Broadcom is Overvalued at 23.8X P/E: Should You Still Buy the Stock?

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Broadcom shares are trading above the 50 and 200-day moving averages (SMAs), indicating a bullish trend.

AVGO Stock Trades Above 50 & 200-Day SMAs

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Is AVGO worth buying at current prices? Let’s dig deep to find out.

AVGO’s Prospects Suffer From Multiple Challenges

Broadcom shares have underperformed Marvell and AMD year to date (YTD) but outperformed NVIDIA. While AVGO shares have returned 20.2%, NVIDIA, Marvell and AMD have appreciated 16.6%, 121.5% and 149.9%, respectively.

AVGO Stock’s Price Performance

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Broadcom shares have suffered from disappointing near-term guidance and the lack of a meaningful increase to AVGO’s longer-term AI outlook. The company raised its forecast for fiscal 2026 AI semiconductor revenues to $56 billion and reiterated expectations for more than $100 billion in AI revenues in fiscal 2027. 

Broadcom also guided for the gross margin to decline to 74% in the third quarter of fiscal 2026 from 77.1% in the fiscal second quarter due to a greater mix of lower-margin AI semiconductor revenues, raising concerns that profitability may not scale as quickly as revenues.

Broadcom’s AI growth story is concentrated around approximately six large customers, including Google, OpenAI, Anthropic and Meta Platforms. Management repeatedly referenced these few customers as the primary drivers of future demand. The company is also suffering from elevated AI expectations. Any lag in AI deployment schedules, power availability constraints, customer spending moderation or supply chain issues could lead to significant investor disappointment.

While AI semiconductor revenues are growing in the triple digits, infrastructure software grew only 9% year over year in the second quarter of fiscal 2026. The company is becoming increasingly dependent on AI semiconductors as the primary growth engine, which is a headwind for investors.

AVGO’s Strong AI Growth Boost Competitive Prowess

Broadcom’s prospects are expected to benefit from surging demand for AI semiconductors, expanding custom accelerator programs, strength in AI networking, improving non-AI semiconductor demand and accelerating infrastructure software growth. 

AI semiconductor momentum remains the most significant growth driver. Broadcom is witnessing robust demand for custom AI accelerators (XPUs) and networking products as hyperscalers and frontier AI model developers expand compute infrastructure. AI semiconductor revenues surged 143% year over year to $10.8 billion in the second quarter of fiscal 2026, while quarterly AI semiconductor bookings exceeded $30 billion. The company expects AI semiconductor revenues to reach $16 billion in the third quarter, representing growth of more than 200% year over year, and approximately $56 billion for fiscal 2026. Moreover, Broadcom expects AI semiconductor revenues to exceed $100 billion in fiscal 2027 and continue growing in fiscal 2028.

Expanding engagements with major AI customers should provide substantial long-term revenue visibility. Broadcom has a long-term agreement with Google to develop and supply multiple generations of TPUs and AI networking products. The company is also expanding its relationship with Anthropic, which is expected to gain access to an additional 5 gigawatts of next-generation TPU-based compute beginning in 2027. Broadcom has delivered silicon for OpenAI and expects production to begin in late 2026, with a contractual commitment for 1.3 gigawatts of deployment in 2027 as part of a larger 10-gigawatt agreement through 2029. Meanwhile, the Meta partnership is expected to deploy 3 gigawatts through 2028, with initial deliveries beginning in the second half of 2027. Two additional customers are expected to begin shipments in late 2026 and ramp in 2027, supported by $6 billion of purchase orders received to date.

Broadcom’s leadership in AI networking is another key catalyst. Increasing deployment of large XPU and GPU clusters requires substantial networking content, positioning it to benefit from AI infrastructure spending beyond custom accelerators. Its portfolio spans high-speed SerDes, Ethernet and PCI Express switches, optical components and data-center fabrics. The company has been shipping its 100-terabit Tomahawk 6 Ethernet switch for more than a year and is taping out its next-generation 200-terabit switch, while its Jericho3 and Jericho4 solutions support large hyperscale deployments.

VMware and private-cloud adoption should strengthen the infrastructure software business. Infrastructure software revenues increased 9% year over year to $7.2 billion in the second quarter, accompanied by 17% growth in annual recurring revenue. Broadcom expects software revenues to accelerate to approximately $8.9 billion in the third quarter, up 31% year over year. VMware Cloud Foundation 9.1 is designed to improve infrastructure efficiency and security while supporting enterprise AI inference. Strong global server demand and adoption of VCF 9.1 for on-premise cloud computing are driving deployment, while support for AMD, Intel and NVIDIA architectures enables enterprises to run AI, Kubernetes and traditional virtualized workloads on a common private-cloud platform.

AVGO’s Q3 Earnings Estimate Revision Shows Steady Trend

The Zacks Consensus Estimate for third-quarter fiscal 2026 earnings is pegged at $3.22 per share, unchanged over the past 60 days, indicating 90.53% growth from the figure reported in the year-ago quarter.

The Zacks Consensus Estimate for fiscal 2026 earnings is pegged at $11.74 per share, up by a penny over the past 60 days, indicating 72.14% growth from the fiscal 2025 reported figure.

Conclusion

Broadcom’s robust AI semiconductor growth, expanding custom accelerator programs and leadership in AI networking position the company well to capitalize on accelerating AI infrastructure investments. Growing engagements with Google, OpenAI, Anthropic and Meta, along with improving prospects for VMware, further strengthen its long-term growth outlook. These factors justify AVGO’s premium valuation.

Broadcom currently has a Zacks Rank #2 (Buy), which implies that investors should start accumulating the stock right now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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