We’re lifting our price target on Broadcom after its AI business impresses once again

Published: Thursday, June 5, 2025 · 11:57 PM  |  Updated: Thursday, June 5, 2025 · 11:57 PM

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Broadcom on Thursday night reported strong quarterly results and offered upbeat comments on the expected growth of its key artificial intelligence business. While profit-takers are pushing the stock down in extended trading, there is little cause for concern. Revenue in Broadcom’s fiscal 2025 second quarter increased 20% year over year to $15 billion, slightly ahead of the consensus forecast of $14.99 billion, according to estimates compiled by LSEG. Adjusted earnings per share increased 44% from the year-ago period to $1.58, also outpacing expectations of $1.56, LSEG data showed. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) grew 35% year over year to $10 billion in the quarter, beating the FactSet consensus Estimate of $9.94 billion. Shares of Broadcom slumped more than 4% in after-hours trading Thursday, to below $249 apiece. This reaction is not much of a surprise, though, given Broadcom’s reported results and current quarter guidance were only narrowly ahead of expectations and the stock has been flying since early April. Ultimately, the business is in good shape, and we expect shares to resume their upward trajectory into year-end. AVGO YTD mountain Broadcom’s year-to-date stock performance. Bottom line Broadcom continues to fire on cylinders with second-quarter sales, profit margins and earnings all coming in ahead of estimates Thursday night. Expectations were lofty coming into the print, with Broadcom’s stock ending Thursday’s session about $1 a share below the all-time closing high set Wednesday. Sure, the results weren’t enough of a blowout to send shares higher in extended trading Thursday. However, they were strong enough to validate the stock’s nearly 78% rally off its tariff-driven closing low on April 4. Short-term market reaction aside, there should further should be upside ahead for Broadcom shares. The key reason why: There are no signs that demand for the company’s custom AI chips, or “accelerators,” and networking solutions is letting up anytime soon, with CEO Hock Tan calling for robust growth to continue into the company’s next fiscal year. Specifically, Tan said Broadcom expects its fiscal 2025 growth rate for AI revenue to “sustain into fiscal 2026.” Broadcom is the longtime co-developer of Alphabet’s Tensor Processing Unit, and more recently is believed to have added Club name Meta Platforms and TikTok owner ByteDance as customers (it doesn’t name them directly). On the software side, Broadcom continues to make the most of its blockbuster VMware acquisition as the company works to move more customers to subscription-based accounts. Why we own it Broadcom is a high-quality semiconductor and software company run by an incredible CEO in Hock Tan. The company is a big AI beneficiary through its networking and custom chip businesses. It also has a shareholder-friendly capital allocation strategy with its dividends and buybacks. Competitors : Marvell Technology, Advanced Micro Devices and Nvidia Last buy : Nov. 21, 2024 Initiation date : Aug. 24, 2023 During the quarter, Broadcom repurchased about 25 million shares in the three months ended May 4, returning just over $4.2 billion to shareholders. Another $2.8 billion was returned via dividends. Based on everything we saw and heard Thursday night, we’re raising our price target on the stock to $290 a share from $230. Nevertheless, we are maintaining our hold-equivalent 2 given the incredible run we’ve seen since that early April low, which came just two days after President Donald Trump’s “reciprocal” tariff announcement. We’ll be looking for shares to consolidate or provide a more attractive entry point before we consider upgrading it, as bright as Broadcom’s future looks. Commentary Broadcom’s second-quarter semiconductor solutions revenue increased nearly 17% year over year to $8.41 billion, exceeding expectations of $8.34 billion, according to FactSet. The result also represents an acceleration from the 11% year-over-year increase we saw in the first quarter. Gross margin for the segment increased to 69%, a 140-basis point expansion versus the year prior. AI semiconductor revenue, in particular, was $4.4 billion, up 46% year over year. Driving that strong result was custom AI accelerator revenue, which increased double digits versus the year-ago period. As a reminder, Broadcom’s AI business has two parts: custom AI accelerators and networking chips, which are effectively part of the “plumbing” of a data center and help its various components communicate together as a larger computing factory. Notably, AI networking revenue more than doubled versus the year ago period, surging over 170% year-over-year, and representing 40% of total AI revenues. Asked about the strength in networking, Tan said on the call that, over the long term, networking should be less than 30% of AI revenues. On the call, Tan called out Broadcom’s three existing custom chip customers — the aforementioned Alphabet, Meta and ByteDance — while reaffirming that there are currently four “prospects” considering a partnership with Broadcom for custom AI solutions. Tan was asked whether Broadcom’s rosy projections for AI revenue growth in 2026 include any contribution from prospects. “No comment. Don’t talk on prospects. We only talk on customers,” he said. The widely respected CEO weighed in on how the evolving macro landscape around tariffs and the economy is impacting its customers’ pace of AI infrastructure investment. “These partners are still unwavering in their plan to invest despite these certain economic environment,” he said. “In fact, what we’re seeing recently is that they are doubling down on inference in order to monetize their platforms. And reflecting this, we may actually see an acceleration of [custom chip] demand into the back half of 2026 to meet Urgent demand for inference.” This is a notable comment because there’s two overarching categories of AI computing. The first is training, where large quantities of data are fed into models to prepare them for use. The second is inference, which is the day-to-day use of AI models. In that way, growing demand for inference computing among Broadcom’s customers is a good sign of AI adoption in the real world. For companies to continue pouring billions into AI computing capacity, they need their own customers to be using AI. In the legacy semiconductor businesses, revenue fell 5% versus the year-ago period to $4.0 billion. Tan acknowledged that while the segment is “close to the bottom,” it has been “relatively slow to recover.” Nonetheless, Tan did call out a few bright spots including sequential growth for Broadband enterprise networking and server storage solutions. Industrial sales, on the other hand, were down, as were wireless revenues, in line with seasonal trends. Keep in mind: Club name Apple is Broadcom’s unnamed wireless customer, so the sales here tend to show up closer to the new iPhone release in the back half of the calendar year. “We expect enterprise networking and broadband to continue to grow sequentially, but server storage, wireless and industrial are expected to be largely flat. And overall, we forecast non-AI semiconductor revenue to stay around $4 billion,” Tan said. Infrastructure software revenue grew about 25% year over year to $6.6 billion, also ahead of the $6.47 billion consensus estimate, according to FactSet. Gross margin for the segment expanded to 93%, up from 88% the year prior. The segment continues to benefit from Broadcom’s successful efforts to convert VMWare’s perpetual license users for compute virtualization to VMware Cloud Foundation (VCF) subscriptions. VCF allows an entire data center to be virtualized and allows customers to create their own private cloud, which Tan said “will enable them to repatriate workloads from public clouds while being able to run modern container-based applications and AI applications.” In fact, Tan said 87% of the company’s largest customers have already adopted VCF. Guidance For its third fiscal quarter of 2025, Broadcom forecasted total revenue to be about $15.8 billion, representing growth of 21% year over year. That target is slightly above the $15.75 billion consensus, according to estimates compiled by FactSet. Importantly, AI revenue is expected to increase significantly in the current quarter, with Tan forecasting 60% year-over-year growth to $5.1 billion. Add in the legacy semiconductor business forecast of $4 billion, and we get a semiconductor solutions segment guide of about $9.1 billion, ahead of the $8.98 billion consensus forecast, according to FactSet. The $6.7 billion revenue guide we got for the infrastructure software segment also looks good against expectations of $6.68 billion, according to FactSet. The company expects adjusted EBITDA to be approximately 66% of projected revenue, or $10.43 billion, ahead of the $10.37 billion consensus estimate, according to FactSet. (Jim Cramer’s Charitable Trust is long META, AAPL, AVGO and NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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