Broadcom's AI Revenue Just Jumped 143%. So Why Is the Stock Sliding?

Along with Nvidia, Broadcom (NASDAQ: AVGO) has probably been one of the absolute best AI stocks over the past several years.

The leading manufacturer of semiconductor chips for communications networks just had blowout results in its fiscal second quarter. Overall revenue surged 48% year over year to a record $22.8 billion. Net income rose 88% to $9.3 billion, and adjusted earnings climbed 54% to $2.44 per share, beating estimates.

The main driver of revenue has been AI. In the quarter ended May 3, semiconductor revenue from AI rose 143% year over year to $10.8 billion, exceeding its forecast. CEO Hock Tan said the AI revenue gains were fueled by increasing demand for custom AI accelerators and AI networking.

Image source: Getty Images.

Furthermore, Tan expects semiconductor revenue from AI to rise more than 48% sequentially and 200% year over year to $16 billion in the fiscal third quarter.

So why did the stock tank 13% on the day after earnings, and why is Broadcom's share price down roughly 22% since then to its current $376 per share?

Explosive growth not enough?

It can be a head-scratcher -- but it's also an opportunity. There were likely a couple of reasons, but they shouldn't be too much of a concern.

First, on the Q2 earnings call, Tan called for AI semiconductor revenue growth of 180% year over year to $56 billion. However, that would mean sequential growth for the fourth quarter would be slightly lower, around 30%, than what is anticipated for Q3.

Tan also maintained the $100 billion AI revenue guidance for fiscal 2027, which would be about 78% year-over-year growth. Some analysts thought it would be raised based on its strong performance and its $73 billion in AI backlog announced at the start of 2026, to be contracted over the ensuing 18 months.

There was also a projected dip for the gross margin from 77.1% in Q2 to a projected 74% in Q3, due mainly to the rapid increase in sales of lower-margin AI chips.

Should you buy Broadcom on the dip?

These projections are more than likely just management being overly cautious due to uncertainities in the global economy. But I would fully expect Broadcom to exceed these targets.

The primary reason for the sell-off is profit-taking. At that point, Broadcom stock had reached an all-time closing high of roughly $480 per share -- up 38% year-to-date and 86% over the past 12 months. The price-to-earnings (P/E) ratio had jumped to over 80 times earnings, with a forward P/E ratio near 40.

There was also broader uncertainty about high AI spending and flattening growth among AI stocks, combined with sky-high valuations after a strong April and May.

The 22% sell-off has brought Broadcom stock to a much more reasonable valuation level. Its P/E ratio is still high at 60, but its forward P/E is just 19 -- a bargain for a stock with this type of backlog and earnings power. Even better, it is undervalued relative to its long-term earnings potential, with a five-year price/earnings-to-growth (PEG) ratio of just 0.4.

Broadcom stock is a no-brainer buy right now.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Broadcom and Nvidia. The Motley Fool has a disclosure policy.