The tech sector has been under some pressure recently, and one stock that has been hit hard is Broadcom (AVGO +0.14%). After hitting a record high of $495 in early June, the stock has now lost more than 22% of its value.
The stock took an initial hit following its fiscal Q2 earnings results, as it failed to lift its fiscal 2027 guidance for AI chip revenue. This seemed to be a clear overreaction, as there was no real reason for Broadcom management to raise a forecast more than a year away. The company is still projecting that its AI chip revenue will grow to well over $100 billion in fiscal 2027, a huge number given that it produced under $64 billion in fiscal 2025 revenue.
Image source: The Motley Fool.
Time to buy the dip on Broadcom
The sell-off in Broadcom stock has brought its valuation down to a forward price-to-earnings (P/E) ratio of around 19.5 times fiscal 2027 analyst estimates. That's cheap for a stock that is riding two powerful market trends set to see explosive growth in the coming years.
The first trend Broadcom is riding is hyperscalers (owners of large data centers) looking to replace Nvidia's graphics processing units (GPUs) with cheaper alternatives for their AI workloads, especially for inference, which is an ongoing cost. The company is a leader in ASIC (application-specific integrated circuit) technology and helped Alphabet develop its highly successful Tensor Processing Units (TPUs). Alphabet plans to spend up to $190 billion in capital expenditures (capex) this year, with further increases next year, and much of that spending will go toward TPUs.
It has also allowed Anthropic to place TPU orders directly with Broadcom, including $21 billion worth to be delivered this year. The three companies recently extended their partnership for future TPU iterations.
The success of TPUs has also led other hyperscalers, including OpenAI, to begin developing their own custom AI chips with Broadcom's help. The company's list of AI ASIC customers is growing, and between its TPU business and new customers, this business is set to see strong growth in the coming years.
NASDAQ: AVGO
Key Data Points
At the same time, Broadcom is a leader in data center networking and co-packaged optics (CPO), two areas becoming increasingly important as AI cluster sizes continue to grow. Larger clusters require faster connectivity, making networking a critical component of overall system performance. This complements Broadcom's growing custom AI ASIC business, as customers often need both AI chips and networking solutions simultaneously. Broadcom's expertise in CPO could also provide an additional competitive advantage over time as hyperscalers seek to address power and bandwidth constraints.
Given its strong growth prospects and attractive valuation, I'd be buying this AI stock on this dip.
