Broadcom (AVGO) has long been one of my best holdings and a fantastic compounder, and its Q1 2026 earnings report as well as some of the comments shared on the call seem to give credence to the idea that this will continue for the foreseeable future as the narrative continues to shift from steady growth to hyper-acceleration due to the AI shift.
On the call, CEO Hock Tan and his team laid out a roadmap that continues to suggests that Broadcom is one of the tool booths needed to make the AI transformation work well.
The Business: More Than Just Chips
Broadcom is more than just a custom chip business. It’s true that it’s often described simply as a chipmaker, but it’s actually much more than that. Broadcom operates in two primary worlds:
- Semiconductor Solutions (Hardware): This is the foundation of the company. Broadcom dominates in several critical categories:
- Custom AI Accelerators (XPUs): This is the crown jewel and likely why the company is often see as a chipmaker. These are ASICs (Application-Specific Integrated Circuits) co-developed with hyperscalers (like Google’s TPU or Meta’s MTIA). Unlike general-purpose GPUs, these are hard-coded for specific AI workloads, offering superior efficiency and performance for training and inference. Companies which want to be less beholden to NVDA come to Broadcom to help develop their own chips which may be cheaper and more focused on specific tasks.
- Networking & Connectivity: Beyond chips, this is another growth area for AVGO. Broadcom is becoming the undisputed leader in high-performance switching (Tomahawk) and routing (Jericho) chips. They provide the pipes that allow thousands of GPUs and XPUs to communicate within a cluster. While their traditional networking business isn’t really growing, their AI networking business is thriving.
- Wireless and Industrial: They provide essential components for smartphones (including major RF and Wi-Fi content for the iPhone) and a variety of industrial and broadband applications.
- Infrastructure Software: This segment was transformed by the $69 billion acquisition of VMware. While this business isn’t a growth engine for them anymore, it does provide very high margins and cash flows which be re-invested in R&D on the semiconductor solutions side.
- VMware Cloud Foundation (VCF): This is the flagship product. It acts as the operating system for the modern private cloud, virtualizing computing, storage, and networking.
- The Strategic Moat: VCF is increasingly critical in AI environments because it serves as the permanent abstraction layer between AI software and the physical silicon (CPUs/GPUs). This makes the software somewhat AI-safe and essential for enterprises trying to scale complex generative AI workloads without being locked into a single hardware vendor.
- Mainframe & Cyber Security: The segment also includes robust software suites from the acquisitions of CA Technologies and Symantec, providing deep roots in enterprise security and management.
Q1 Results: A Beat Across the Board
Broadcom walked into the quarter with high expectations, and it cleared them with room to spare.
- Revenue: Record $19.3 billion, up 29% year-on-year. Analysts were looking for roughly $19.1–$19.2 billion. This was driven primarily by AI semiconductor revenue, which exploded 106% to $8.4 billion.
- Earnings Per Share (EPS): Non-GAAP diluted EPS came in at $2.05, surpassing the consensus estimate of $2.02.
- Margins: The company maintained its amazing profitability. Adjusted EBITDA was a record $13.1 billion, representing a staggering 68% margin. Gross margins remained rock-solid at 77%.
- Free Cash Flow (FCF): Cash generation remains Broadcom’s strength. They generated $8 billion in free cash flow (41% of revenue), which funded $10.9 billion in shareholder returns this quarter alone through dividends and buybacks. Do note that the companies does issue $2B+ in stock base compensation as well which offsets some of the buybacks.
Q2 Guidance: The Great Forecast
While the Q1 numbers weren’t a huge beat, the Q2 guidance was impressive. Broadcom guided for $22 billion in revenue for the second quarter. To put that in perspective, consensus was sitting around $20.4 billion. That’s a nearly $1.6 billion beat on guidance alone.
Management expects AI revenue to accelerate even further, jumping to $10.7 billion in Q2 (up 140% YoY). This type of growth is certainly impressive and it doesn’t seem like it’s anywhere close to being done.
Beyond 2026: The $100 Billion Line of Sight
One of the most significant moments of the call was Hock Tan’s commentary on fiscal 2027 and 2028. Typically, management is hesitant to look that far out, but Tan stated that visibility has dramatically improved.
Broadcom now has a line of sight to achieve AI chip revenue in excess of $100 billion in 2027. Furthermore, they have already fully secured the supply chain capacity, wafers, high-bandwidth memory (HBM), and substrates, required to hit these numbers through 2028. This effectively silences any concerns about supply constraints or AI digestion cycles in the near term. They specifically called out partners like Anthropic planning 1GW of TPUs in 2026 and 3GW of TPUs in 2027, OpenAI deploying 1GW in 2027 and Meta deploying multiple GW in 2027 and beyond on top of other partners like Google.
It seems like there’s a clear line of path for AI growth to continue to be huge for the next few years and that’s on top of their other business lines like VMware which makes me feel really good about the $135B revenue projections analysts had for fiscal year 2027.
Broadcom’s Role in the AI Ecosystem
The earnings call solidified the idea that Broadcom is the becoming the other AI giant alongside NVIDIA. While NVIDIA provides the general-purpose brain (GPUs) for AI, Broadcom provides the customized brains (XPUs) and the nervous system (Networking).
Hock Tan clarified that custom accelerators are not just a secondary option; they are a strategic necessity for the world’s largest companies. He noted that custom XPUs allow hyperscalers to optimize for specific workloads (like inference) at a fraction of the power and cost of standard GPUs. With 6 major customers now in the fold, including Google, Meta, Anthropic, and the newly revealed OpenAI, Broadcom’s custom silicon moat looks wider than ever.
Deep Dive: Strengths, Weaknesses, and the Q&A
Strengths:
- Networking Dominance: The Tomahawk 6 switch and 200G SerDes are capturing massive market share. Networking now makes up 1/3 of AI revenue and is expected to grow to 40% in Q2. Add that to the AI chip growth and you’ve got an impressive AI business in the making.
- VMware Synergy: VMware revenue grew 13%, and bookings are growing even faster($9.2 billion in TCV driving a 19% ARR growth). This business is proving to do well even in an AI-first world.
- The Stickiness factor: These aren’t transactional sales. These are multi-year strategic partnerships where Broadcom is embedded in the customer’s long-term roadmap and as these chips need to be updated, Broadcom is likely the partner of choice as moving these lines over to other competitors(not that many exist) isn’t easy. Broadcom is also investing in advanced packaging making sure they’ve got all the necessary areas locked up to meet upcoming demand.
Potential Weaknesses:
- Customer Concentration: While having the 6 biggest spenders in the world is great, Broadcom is heavily dependent on these hyperscale budgets. If one pivots, it leaves a mark. However, Tan countered this by noting their multi-year supply agreements but Broadcom is hugely dependent on the AI boom continuing past 2028-2029 where these agreements will need to be renewed and AI capex spend will need to remain high to drive continued growth.
- Non-AI Flatness: Traditional enterprise networking and broadband were flat. While AI is more than making up for it, the legacy parts of the business are currently just treading water.
Q&A Highlights: The analysts were focused on racks vs. chips and the potential margin dilution of selling full systems. CFO Kirsten Spears was very firm: while Broadcom is shipping more systems, their yields and costs have improved to the point where it won’t meaningfully drag down margins. Hock Tan also explicitly defended Meta’s MTIA program, stating it is alive and well and shipping now, despite rumors of delays.
Valuation: Is AVGO a Buy?
Broadcom’s stock often looks expensive on a trailing basis, but when you look at the 2027 roadmap, the math starts to change. The company is trading at roughly 1.8% free cash flow yield on a trailing 12 month basis but that number climbs to 3% based on 26 estimates and up to 4.3% based on 27 estimates. Now that those estimates seem more set in stone, it’s not a bad price to pay for a company that’s likely to double its revenue between 25 and 27 and looks like a vital cog in the AI boom.
They just authorized an additional $10 billion for share repurchases which will likely get used up quick and refilled just as quick, and the company does pay a small dividend as well. As a shareholder myself, I find it hard to see a reason to sell here. Broadcom is the rarest of beasts: a massive value-generating machine that has suddenly caught a high-growth tailwind. The price certainly reflects some of that already as the stock is up 70% in the last year and 400% in the last 3 but this earnings release makes it clear that the company has a long runway ahead of it. It’s not cheap by any means but it’s less expensive than it may look on paper when you consider the growth in the years ahead.
If AI is here to stay and capex from the major players won’t suddenly fall of a cliff, I see no reason why this stock can’t double in the next few years.
Verdict: For long-term investors, Broadcom remains a core hold at minimum, and for those looking for AI exposure without maybe less extreme volatility of some pure-play hardware names, it is a buy on any meaningful dip and that dip may come given the volatility in the market these days.
As with any AI names, it will be very beholden to capex guidance especially as Broadcom is so tied into the major players in this space so volatility will still exist but to me, any large dips would be an opportunity to add more.
Disclaimer: I currently hold shares of Broadcom (AVGO). This article is for informational purposes only and does not constitute financial or investment advice. Always perform your own due diligence before making any investment decisions.
