TLDR
- Broadcom reports Q3 earnings on Sept. 4 with AI revenue expected to surge 60% year-over-year to $5.1 billion
- Piper Sandler analyst raised price target to $315, up from $300, citing strong AI chip demand
- Stock trades at expensive valuations with P/S ratio of 24.3 and P/E ratio of 108.4
- Three hyperscale customers plan to deploy up to 1 million AI accelerators each by 2027
- Company’s AI semiconductor business benefits from custom chip demand versus standard GPUs
Broadcom stock gained 1.5% on Friday as investors position themselves ahead of the company’s fiscal 2025 third-quarter earnings report scheduled for Sept. 4. The semiconductor giant expects to deliver another quarter of explosive AI revenue growth.
The chipmaker anticipates total revenue of $15.8 billion for the quarter ended July 30. Management guidance suggests AI revenue will jump 60% year-over-year to $5.1 billion.
This represents a sharp acceleration from the previous quarter. Broadcom’s Q2 AI revenue hit $4.4 billion, growing 46% compared to the same period last year.
Piper Sandler analyst Harsh Kumar boosted his price target on Broadcom shares to $315 from $300 on Friday. Kumar maintained his overweight rating on the stock.
The analyst expects Broadcom’s semiconductor business to grow 60% year-over-year in the current quarter. He cited strong demand for AI-suitable components as the primary growth driver.
Kumar noted that while the company’s non-AI business remains stagnant, it appears on the verge of recovery. The AI segment continues to dominate Broadcom’s growth story.
Hyperscale Customers Drive Demand
Major technology companies are increasingly turning to Broadcom for custom AI accelerators. These chips offer more flexibility compared to standard graphics processing units from competitors like Nvidia.
At least three hyperscale customers, including companies like Alphabet, plan to deploy up to 1 million AI accelerators each by 2027. This creates a potential market opportunity worth $60 billion to $90 billion in 2027 alone.
Broadcom also supplies critical networking equipment for data centers. The company’s Ethernet switches regulate data flow between chips and devices, with the latest Tomahawk Ultra variant offering industry-leading performance.
The company’s hardware expertise spans decades in computing. Broadcom has developed everything from cable modems to Wi-Fi chips since the 1960s.
Profitability Surges Alongside Revenue
Broadcom’s bottom line improved dramatically in the most recent quarter. GAAP net income jumped 134% year-over-year to $4.9 billion in Q2.
Adjusted EBITDA climbed 35% to $10 billion during the same period. This metric excludes one-off and non-cash expenses, providing a clearer view of operational performance.
Management expects adjusted EBITDA to reach approximately $10.4 billion in Q3. This suggests continued momentum in the company’s profitability trends.
The company has focused on cost management while pursuing growth. This approach has delivered higher profit margins for patient investors.
Valuation Concerns Persist
Despite strong fundamentals, Broadcom trades at elevated valuations that may concern some investors. The stock carries a price-to-sales ratio of 24.3, near record highs.
This P/S ratio sits almost three times higher than the company’s 10-year average of 8.4. The valuation reflects investor optimism about AI growth prospects.
Broadcom’s trailing-12-month earnings of $2.67 per share translate to a P/E ratio of 108.4. This makes the stock three times more expensive than the Nasdaq-100’s P/E ratio of 33.5.
The high valuation could limit short-term upside potential even if earnings results exceed expectations. Long-term investors may find better value opportunities despite the growth story.
Recent MIT research questioned enterprise AI returns, though this may reflect implementation challenges rather than fundamental technology problems. Businesses are still learning to optimize their AI investments effectively.
Broadcom’s Q3 results will provide fresh insight into whether AI demand can justify current stock prices and sustain the company’s growth trajectory through 2025.
