Broadcom's (AVGO 12.47%) stock dropped 15% on June 4 after the chip and software giant reported its latest earnings. For the second quarter of fiscal 2026, which ended on May 3, its revenue rose 48% year over year to $22.19 billion, beating analysts' estimates by $70 million. Its adjusted EPS grew 54% to $2.44 and cleared the consensus forecast by four cents.
For the third quarter, Broadcom expects revenue to rise 83% year over year to $29.4 billion, exceeding Wall Street's expectations for 79% growth. However, its outlook for $16 billion in AI chip revenue for the third quarter missed the consensus estimate of $17.2 billion.
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Those seem like minor flaws, but Broadcom's stock had already risen 38% year to date before its latest earnings report. Therefore, it wasn't surprising to see investors take some profits -- but Broadcom could still be one of the biggest winners in the booming AI market.
Why is Broadcom a top AI play?
Over the past decade, Broadcom (formerly Avago before it acquired the original Broadcom) expanded rapidly through bold acquisitions. It built a new infrastructure software business by acquiring several large companies, including the cloud giant VMware, and it launched new application-specific integrated circuits (ASICs) to accelerate AI applications.
Unlike Nvidia (NVDA +2.08%), which produces general-purpose data center GPUs for training AI algorithms, Broadcom designs custom ASICs for hyperscalers such as Meta and Alphabet's Google.
NASDAQ: AVGO
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At scale, these ASICs can help those hyperscalers process AI tasks more cost-efficiently than Nvidia's GPUs. They can also reduce their long-term dependence on Nvidia.
That's why Broadcom's sales of AI chips soared 65% to $20 billion in fiscal 2025 (which ended last November), accounting for 31% of its top line. It's also bundling its AI chips with its other non-AI chips and infrastructure software to widen its moat and lock in its customers.
Why is Broadcom's stock worth buying?
Broadcom's slower-than-expected AI chip revenue growth in the third quarter was disappointing, but that's still 200% year-over-year growth. It also reiterated its forecast of generating $100 billion in AI chip revenue in fiscal 2027 (59% of its projected $169 billion in revenue).
That outlook, while unchanged from the previous quarter, indicates it can meet Wall Street's rosy estimates. From fiscal 2025 to fiscal 2028, analysts expect its revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to grow at CAGRs of 52% and 53%, respectively. Those are explosive growth rates for a stock that trades at just 19 times next year's adjusted EBITDA. So while some myopic investors head for the exits, long-term investors should still buy Broadcom to profit from the ongoing AI boom.
