While Nvidia (NVDA) is hailed as the king of AI compute, Broadcom (AVGO) is quietly working its way to becoming the landlord of the AI era. Most investors look at the stock's 50x trailing multiple and believe that the stock is priced for a "perfection" it can't possibly sustain. (See AVGO valuation multiples)

But viewing Broadcom through the rearview mirror of legacy hardware is a mistake.

When you strip away the commodity cycles, the company emerges as the structural toll booth of the AI era. It sits at the high-margin intersection of three massive secular shifts: the pivot from experimental AI training to massive-scale inference, the physical transition from copper wiring to light-speed optics, and the conversion of the private cloud into a high-yield subscription engine via VMware.

 

 

The $20B Pivot Toward AI Inference Chips

Broadcom designs custom AI chips (ASIC) for Alphabet (GOOG), Meta (META), ByteDance, OpenAI, and Anthropic. These chips are purpose-built for running specific AI workloads and are more cost efficient. As an example, Google's custom inference chip, built with Broadcom's involvement, costs roughly a third of a comparable Nvidia GPU and runs significantly more energy-efficiently.

That efficiency gap matters because the AI workload mix is changing. Training a model is a one-time event. Inference - serving AI responses to users at scale - runs continuously and accounts for a growing majority of AI compute spending. Broadcom's custom silicon is optimized precisely for that workload.

AI chip revenue reached approximately $20 billion in fiscal 2025. Management reported $8.4 billion in the first quarter of fiscal 2026 alone, implying roughly a doubling year over year. The backlog related to custom AI silicon is now more than $73 billion.

Faster chips require faster interconnects, and Broadcom is not the only one to benefit from that; competitors like Marvell are also seeing significant tailwinds (Read Marvell’s AI Edge: 30% Growth at 26x Earnings)

VMware Integration Drives High Software Margins

The 2023 VMware acquisition restructured Broadcom's financial profile in a lasting way.

Broadcom discontinued perpetual software licenses and moved customers onto subscription bundles priced at 2x to 5x prior levels. Renewal rates held up because migrating is expensive. For stable enterprise workloads, a VMware-based private cloud remains cost-competitive with public cloud over any multi-year horizon.

The software segment generated approximately $27 billion in revenue in fiscal 2025, up 26% year over year, with operating margins around 77%. It is recurring, deeply embedded, and largely insulated from competitive disruption.

Legacy Portfolios Provide $17B in Defensive Cash Flow

Broadcom's legacy portfolio - wireless components, storage controllers, and broadband chips - generates roughly $17 billion annually with little growth. That is intentional. R&D investment in these areas is modest relative to revenue, and the business is managed for cash generation rather than expansion.

The positions are structurally protected: Apple's RF components rely on a specialized manufacturing process difficult to replicate; storage controllers sold to Dell and HPE face long qualification cycles; and broadband chips supplied to major carriers require certification that limits new entrants.

The cash flows are predictable and get redeployed into higher-growth areas.

Why Forward Estimates Drop the Multiple to 19x

The 50x headline number is a trailing earnings figure. It overstates the actual cost of owning the stock today. On forward estimates, Broadcom trades at approximately 29x fiscal 2026 earnings and closer to a mere 19x fiscal 2027. Revenue is expected to grow over 60% this fiscal year and approximately 50% the year after per consensus.

Growth at that rate while maintaining 50%+ net margin is rare.

The bear case rests on cyclicality - the assumption that AI CapEx eventually pulls back and takes Broadcom's earnings with it.

That argument works for commodity semiconductor companies and may be harder to apply here. The $73 billion backlog provides contractual revenue visibility that most chip companies never see.  Stocks with compressed multiples often look cheap because the market is pricing in deterioration. Broadcom's setup is the opposite.

Is AVGO Stock The Right Investment For You?

While Broadcom’s positioning as an AI infrastructure “toll booth” is compelling, the risks are real. Execution across custom silicon, scaling optics, and integrating VMware pricing power must hold, alongside sustained hyperscaler AI spending. See key risks for AVGO

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