Broadcom (NASDAQ:AVGO) just booked $16.7 billion of AI chip sales in a single quarter. In fiscal Q3 2026, AI semiconductor revenue was up 221% from a year earlier, and management guided to $21.7 billion for fiscal Q4, a 236% increase.
Most people have never heard of Broadcom, but its chips sit inside the networks and data centers they rely on every day. The company designs custom AI accelerators (chips built to a customer’s specifications) and networking silicon for the largest cloud companies, and it sells infrastructure software, including VMware, to big enterprises. Semiconductors made up 70% of fiscal Q3 revenue.
The business is clearly booming. The harder question is whether the stock’s premium to its own history and its sector is fair, and that depends on how long growth can hold this pace and how many customers it rests on.
Custom chips and software that’s hard to leave
Broadcom’s edge is that it builds with its customers rather than selling off a shelf. A custom accelerator is designed around one customer’s workloads, and the networking chips linking thousands of them together come from the same supplier. Once a cloud company builds its systems around a design, switching means starting over.
Software adds a second anchor. Infrastructure software revenue grew 29% to $8.75 billion in fiscal Q3, helped by strong demand for VMware Cloud Foundation, and most new software contracts no longer include termination-for-convenience provisions.
Cash generation backs it up. Free cash flow hit a record $13.7 billion, or 46% of revenue, and management guided to a non-GAAP operating margin of about 66% for fiscal Q4. One of AVGO’s rivals selling AI chips off the shelf has a very different customer story, see which one.
AI is becoming the whole story
The mix is shifting fast. Semiconductors were 70% of revenue in fiscal Q3, up from 57% a year earlier, as that segment rose 127%. Total revenue climbed 86% to $29.6 billion, and fiscal Q4 guidance of about $34.8 billion is a 93% increase from the prior-year period.
Earnings kept pace. Adjusted EPS was $3.32, up 96%, while GAAP EPS was $2.68, up 215%. The gap reflects items like acquisition-related amortization and stock-based compensation, and since GAAP grew even faster, the direction doesn’t depend on which one is used. The moat looks like it’s widening.
Is Broadcom leaning too hard on a few big customers?
Broadcom estimates its top five end customers made up about 55% of fiscal Q3 revenue, up from about 40% a year earlier. CEO Hock Tan told CNBC that Anthropic is on track to become its largest custom chip customer in 2027, which is why the stock fell 4.8% in one session in recent weeks after Anthropic’s CEO argued for a slower pace of model development. Tan said the long-term AI revenue targets hadn’t changed.
There’s balance-sheet exposure, too. Broadcom agreed to backstop one customer’s AI-rack lease obligations over five years, with maximum exposure of $29 billion. If the customer defaults, remedies include assuming the lease or selling the racks. It’s a ceiling, not money already spent, but it ties Broadcom’s results to its customers’ ability to pay. This is the main risk behind the premium. If you’re looking to increase your exposure to AI, you might like this list of stocks to play the AI data-center buildout.
A premium multiple as growth starts to ease
Investors are paying 30.46 times expected earnings, above both the stock’s 5-year average of 27.28 and the sector’s 23.58. Each $1 of expected earnings costs more than it has typically cost, and more than the sector average.
Growth explains part of that. Analysts expect earnings to grow 70.93% in fiscal 2026, easing to 66.36% in fiscal 2027. Those are extraordinary rates, and they go a long way toward justifying a premium to the sector. Broadcom’s EPS is expected to be $19.39 in fiscal 2027, and that would bring its P/E down to 18.3x. That forward valuation looks even more attractive when compared to the broader tech sector, where much slower-growing peers trade at significantly higher multiples. If execution remains tight and demand holds steady, the stock can potentially outpace its current premium.
The direction still matters, however. The multiple sits above its own average just as expected growth steps down, and that growth has to come from a customer base that’s getting narrower. Fiscal Q4 guidance supports the near term, and free cash flow at 46% of revenue gives the earnings real backing. But the premium leaves less room for a miss than the 5-year average would.
Hedge fund interest slipped, with 170 funds holding the stock in the most recent quarter, down from 173 in the prior one. Short interest is 1.09%, which signals relatively limited bearish positioning.
Fair, but with little room for error
The evidence points to a premium that’s earned but not cheap. Revenue up 86% and expected earnings growth of 66.36% support paying more than the sector’s 23.58. Paying more than the stock’s own 27.28 average while growth eases asks for steady delivery. The setup suits long-term investors comfortable with customer concentration. A miss on the $21.7 billion AI revenue guide for fiscal Q4, or a further rise in the top-five share of revenue, would weaken the case.
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This article is originally published at Insider Monkey.
