Broadcom's AI Revenue Just Soared 143%. So Why Is the Stock Falling?

As one of the primary beneficiaries of the adoption of artificial intelligence (AI), Broadcom (NASDAQ:AVGO) has become something of a bellwether in the industry. As such, all eyes were on the company on Wednesday afternoon as investors sought clarity on the state of AI adoption.

The bar was set high heading into the company's quarterly financial report, and shareholders were looking on with interest. Broadcom's results offered keen insight into the trajectory of the industry, providing convincing evidence that the proliferation of AI is continuing at a rapid pace.

Image source: The Motley Fool.

AI momentum is growing

Broadcom delivered the results of its fiscal 2026 second quarter (ended May 3), and they were impressive. Record revenue of $22.2 billion climbed 48% year over year -- accelerating from 29% growth in Q1 -- fueling adjusted earnings per share (EPS) of $2.44, which jumped 54%.

For context, analysts' consensus estimates called for revenue of $22.12 billion and adjusted EPS of $2.40, so Broadcom surpassed expectations with room to spare.

Continuing demand for the company's AI solutions fueled its record results, as AI semiconductor revenue surged 143% year over year to $10.8 billion. This marked the 13th consecutive quarter of AI-centric growth. Cash generation was also strong, as operating cash flow of $10.49 billion drove free cash flow of $10.26 billion, or 46% of revenue.

CEO Hock Tan was crystal clear about what was fueling the company's growth, saying, "Broadcom achieved record revenue, operating profit, and free cash flow in Q2 driven by accelerating growth in AI semiconductor revenue and strong operating leverage." He went on to cite "increasing demand for custom AI accelerators and AI networking" for driving the robust results.

CFO Kirsten Spears issued a head-turning third-quarter forecast, guiding for revenue of $29.4 billion, an increase of 84% year over year, with its operating profit margin stable at 67% -- which she attributed to the company's "strong operating leverage.” For context, analysts' consensus estimates were calling for Q3 revenue of $28.47 billion.

However -- as this quarter illustrates -- Broadcom has a history of issuing conservative guidance, and the coming quarter is likely no different. Tan said he expects demand to continue to accelerate, guiding for AI semiconductor revenue to surge 200% to $16 billion.

Broadcom also continued its generous capital return program, announcing a quarterly dividend of $0.65 per share, payable on June 30 to shareholders of record on June 22. While its dividend yield of 0.5 might seem paltry, that's a function of the stock's stratospheric rise, which is up 93% over the past year. Moreover, with a payout ratio of 55%, there’s plenty of room for future increases.

At 42 times forward earnings and 26 times next year's expected earnings, Broadcom might seem expensive at first glance. However, growth of this magnitude tends to skew the most commonly used valuation metrics. Applying the more appropriate price/earnings-to-growth (PEG) ratio -- which factors in the company's accelerating growth -- returns a multiple of 0.63, when any number less than 1 is the standard for an undervalued stock.

Given Broadcom's accelerating growth, triple-digit AI-centric revenue gains, and bullish outlook, you'd think investors would be celebrating. But that's not the case: the stock is down 14% in after-hours trading (as I write this).

This is no doubt tied to the stock's "premium" valuation and its recent impressive gains. Broadcom closed at a record high on Tuesday, and investors are understandably taking a step back to assess the situation.

However, given its robust forecast and accelerating growth, I would argue that the stock is still a buy.

Danny Vena, CPA has positions in Broadcom. The Motley Fool has positions in and recommends Broadcom. The Motley Fool has a disclosure policy.