Broadcom (NASDAQ:AVGO) is up only about 9% this year and sits about 24% below its 52-week high, even though analysts expect its earnings to rise 71% in fiscal 2026 and 66% in fiscal 2027. Bulls see that gap as an opening. Ken Fisher’s Fisher Asset Management is Broadcom’s largest hedge fund holder, with a stake worth about $5.7 billion, or 1.7% of its portfolio, after raising it by 3% in the second quarter. Broadcom ranks seventh in our list of his 10 best AI stocks. Click here to see the other nine picks.
Broadcom designs custom AI chips built to the exact needs of each large customer, and it makes the networking gear that ties thousands of chips together inside a data center. Nvidia sells every customer the same product, while Broadcom builds each one its own. Marvell is the other big custom AI chip stock. Find out which of the two has more room to run. Google’s and Meta’s in-house AI chips both use Broadcom designs. Bulls say this matters most for inference, the work of running AI models after they are trained, which they expect to make up most AI workloads. Cheaper custom chips suit that work well, and each design Broadcom wins is hard for a rival to pry away. The results already show the demand. Revenue in the fiscal third quarter rose 86% from a year earlier, and AI chip revenue rose 221%.
Bear case
The weak share price suggests investors have doubts. Broadcom’s guidance for the fiscal fourth quarter came in just below what Wall Street expected, and the stock has mostly moved sideways while other chip stocks recovered from their summer lows. Want more AI ideas? See our list of the 10 best AI stocks to buy before they explode.
Broadcom also relies on a handful of very large customers, and those buyers hold real influence over it. Because it builds chips to each customer’s specifications, losing or shrinking one of those relationships would hurt. Nvidia is the other way to play AI chips. Read our comparison of Nvidia and Broadcom to see which is the better buy now. Growth this fast leaves little room for a miss, and one weak quarter could send the stock lower. The next test is the fiscal fourth-quarter report in December. That is the risk for investors in Broadcom.
Valuation
Broadcom costs 31.1 times forward earnings, above its five-year average of 27.3 and the sector median of 23.8. Analysts expect earnings per share to grow 71% in fiscal 2026 and 66% in fiscal 2027, which pulls the P/E down to about 19 on fiscal 2027 earnings. Even if profit grows only half as fast as analysts expect, the stock would trade at about 24 times earnings, below its usual 27. The PEG ratio, which compares the P/E to growth, is 0.57 against 1.29 for the sector, so Broadcom costs less than half as much per point of growth as a typical stock in its sector. The risk is that analysts have been trimming fiscal 2027 estimates, with 27 cuts against 12 increases over the past month. Broadcom looks undervalued for its growth.
While we acknowledge the risk and potential of AVGO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than AVGO and that has 10,000% upside potential, check out our report about the cheapest AI stock.
READ NEXT: 33 Stocks That Should Double in 3 Years and Cathie Wood 2026 Portfolio: 10 Best Stocks to Buy.
Follow Insider Monkey on Google News.
