Broadcom’s custom AI chip business stays hot and gives the bulls a much-needed win
Broadcom posted solid quarterly results on Wednesday as it painted an increasingly optimistic picture about the future of its custom AI chip business. The report showed that although interest in Broadcom’s shares has waned, it still has the wind at its back in its most important business. Revenue hit a record $19.31 billion in the first quarter of fiscal 2026, which ended Feb. 1, above the $19.18 billion consensus estimate, according to estimates compiled by LSEG. On an annual basis, revenue increased by 29%. According to LSEG data, adjusted earnings per share (EPS) increased 28% to $2.05, beating expectations of $2.03. Adjusted EBITDA rose 30% in the quarter to a record $13.13 billion, beating the FactSet consensus of $12.76 billion. A measure of operating profitability, EBITDA is an abbreviation for earnings before interest, taxes, depreciation, and amortization. AVGO 1Y mountain Broadcom shares over the last 12 months. In short, we may only be scratching the surface of Broadcom’s future. Yes, the custom AI chip designer has already seen incredible growth during this AI boom. But Wednesday’s earnings report and conference call make clear that there’s more on the way, as the most important AI companies in the world look to Broadcom for help producing custom chips to advance their goals. This report is expected to clear up at least some of the headwinds for Broadcom’s chip business; particularly that some of its customers, such as Google, may consider bringing the silicon design process more in-house, relying less on Broadcom’s intellectual property and more on what’s called “customer-owned tooling,” or COT. This concern has been one of the reasons why Broadcom’s shares have struggled to gain momentum this year. Broadcom won’t see competition from customer-owned teams “for years to come,” CEO Hock Tan said on the call. The rationale: We’re still in the land grab phase of the AI computing race, and customers who want custom solutions need them quickly and in significant quantities. As Tan puts it, “Anyone can design a chip that works well in the lab.” But the hard part is working with third-party manufacturers like TSMC to ensure the chips go into production smoothly and actually work in the real world once built. This is something Broadcom is incredibly experienced at; perhaps more than anyone else in the world except Nvidia. Particularly regarding Broadcom’s relationship with Google, Tan had encouraging things to say about the roadmap for future versions of Tensor Processing Units (TPUs). Tan said, “As Google, we continue our growth trajectory with strong demand for the 7th generation Ironwood TPU in 2026. In 2027 and beyond, we expect to see even stronger demand from the next generation TPU.” he said. Another concern, which has limited upside for Broadcom and fellow Club chip maker Nvidia, is that the tech giants’ spending on AI development is at its peak and should fall in the coming years. Nvidia’s Jensen Huang backtracked on the issue last week. On Wednesday night, Tan shed light on Broadcom’s customers’ spending intentions after 2026. It didn’t seem like they were worried about a pullback based on the demand they were seeing and commitments from major key customers. Tan said the company’s “visibility in 2027 has increased significantly.” “In fact, today we have a pipeline to achieve over $100 billion in AI revenue from chips, just chips, by 2027. We have also secured the supply chain needed to achieve this.” Some of that $100 billion projection is expected to come from OpenAI, which was confirmed late last year as Broadcom’s sixth private silicon customer. This relationship seems to be going well. OpenAI is expected to “mass-deploy its first-generation XPUs with over 1 GW of compute capacity in 2027,” Tan said. XPU is Broadcom’s preferred acronym for custom chips. Broadcom executives also expressed major concern about short-term hits to gross margins in the back half of this fiscal year from an increase in shipments of certain custom chip orders that contain more non-Broadcom components, such as memory. This issue became a major issue in Broadcom’s last report in December and featured prominently in the stock’s 11% selloff on Dec. 12. CFO Kirsten Spears attempted to walk back that comment during a call Wednesday night. “In further research, compared to the comments I made last quarter, the impact on the overall mix actually won’t be significant at all. So I wouldn’t worry about that,” Spears said. That was positive to hear, especially considering the 77% gross margin reported Wednesday night fell slightly short of expectations. However, better-than-expected sales and increased operating efficiency allowed Broadcom’s operating margin to increase year over year and exceed Wall Street expectations. This was reflected in the earnings rhythm. Management’s estimates for the current quarter also serve to alleviate concerns about the reported quarter. In the statement, Tan said that the growth in artificial intelligence revenue is expected to accelerate. Finance chief Spears added that overall revenue growth is expected to accelerate to a level above what the Street expected. Earnings estimates will also need to be revised higher, with Broadcom projecting a better EBITDA margin than the Street’s modeling to go to press. Along with solid results and optimistic guidance, management signaled confidence in sustainable demand by announcing a newly authorized $10 billion share repurchase authority. Putting it all together, Broadcom has overcome the bumps surrounding its stock and the market is responding well to expanding trading, with shares up about 5%. Bull-bear disputes usually take time to resolve, but this is a positive development in the bulls’ favor. We reiterate our 1 buy equivalent rating and $425 price target. Segment commentary At Semiconductor Solutions, the much larger of the two operating segments and one that Wall Street has focused on because it houses its artificial intelligence business, revenue rose 52.4% from a year earlier to $21.52 billion. That figure beat expectations of $12.4 billion, according to FactSet. AI semiconductor revenue increased 106% year over year to $8.4 billion. This figure includes both custom chip revenue and AI networking products like Ethernet switches that help bring the data center together. Specifically, custom chip revenue increased 140% year-over-year in the quarter; Tan stated that this momentum continued in the second quarter. For its legacy semiconductor subdivision, fiscal quarter revenue was $4.1 billion. Growth in enterprise networking, broadband, and server storage revenues was offset by a seasonal decline in wireless networking (as was the case after the iPhone launch, given that component orders were placed before launch). In Broadcom’s other operating segment, Infrastructure Software, revenue rose slightly from the prior year to $6.8 billion, missing the $6.99 billion consensus forecast, according to FactSet. During the call, Tan noted that VMware was up 13% year-on-year, adding that “bookings remain strong as the total contract value booked in the first quarter exceeded $9.2 billion,” leading to sustained annual revenue growth of 19% year-on-year. Tan also sought to allay concerns that VMWare could be disrupted by artificial intelligence, which has caused concern in the industry this year. VMWare’s virtualization software is the enabler of cloud computing. Tan said VMWare “cannot be eliminated or replaced.” “Essentially, it enables businesses to effectively scale complex generative AI workloads with an agility that hardware alone cannot provide. We believe the growth in Generative and Agentive AI will create the need for more VMware, not less.” Guidance Based on estimates compiled by LSEG, Broadcom estimated total revenue for its current (second) fiscal quarter to be approximately $22 billion; this was well above the $20.56 billion expected. More importantly, AI revenue growth is expected to accelerate in the coming quarter; The team estimates that AI revenue will be $10.7 billion in the second quarter. When we add in the legacy semiconductor business forecast of about $4.1 billion, we get a Semiconductor Solutions segment guide of $14.8 billion, well ahead of the $13.29 billion consensus estimate, according to FactSet. The $7.2 billion revenue guide for Infrastructure Software also beat FactSet’s estimates of $7.13 billion. The company expects adjusted EBITDA for the fiscal quarter to be approximately 68% of projected revenue, or $14.96 billion, above the FactSet consensus of 67.1% and $13.76 billion, respectively. (Jim Cramer’s Charitable Trust is long AVGO. See here for a full list of stocks.) When you subscribe 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 trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he would wait 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT CAN BE GUARANTEED.
