What Is One of the Best AI Stocks to Buy Before the Next Market Rally?

On Oct. 29, the Federal Reserve announced a 25-basis-point cut in benchmark interest rates to 3.75% to 4%. However, the equity markets stumbled as Fed Chairman Jerome Powell highlighted uncertainty about further interest rate easing, especially at the Fed's next meeting in December 2025.

While solid earnings performance from a few prominent technology companies has provided some upside support, Wall Street remains concerned about Powell's remarks. So, now might be a good time for long-term-minded investors at least to look ahead at potentially promising opportunities.

Broadcom (NASDAQ: AVGO) looks like a smart artificial intelligence (AI)-powered pick to consider today. The company is benefiting from increasing global AI spend on data centers, estimated to reach $6.7 trillion by 2030.

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Custom silicon deals

Broadcom's custom silicon chips are in high demand from major hyperscalers and AI model developers. In October 2025, Broadcom partnered with OpenAI to develop and deploy 10 gigawatts of custom AI chips, with deployment scheduled to begin in the second half of 2026 and continue through 2029. The company will also codevelop Ethernet and other connectivity solutions needed to support large AI clusters.

In October, Anthropic also announced an expanded deal with Alphabet to use the latter's nearly 1 million tensor processing units (TPUs), and gain access to over 1 gigawatt compute capacity by 2026. Broadcom is also rumored to benefit from this deal, since it has been Alphabet's primary chip design partner for these TPUs.

These strategic deals ensure multi-year revenue visibility and position Broadcom as a key player in the global AI infrastructure buildout.

Networking demand

With the increasing complexity of AI models and expanding size of AI clusters, demand for open-source Ethernet networking hardware and software at data centers is rising at an unprecedented pace. The need for low-latency, low-congestion, and high-bandwidth networking has become mission-critical as AI clusters scale beyond 100,000 compute nodes.

Broadcom's Ethernet-based Tomahawk chips enable open and effective networking between GPUs and XPUs within a rack, also called scale-up networking. The company is also utilizing advanced Tomahawk switches for scale-out networking, which simplifies connections and communication within racks in an AI cluster.

Finally, hyperscalers are deploying Broadcom's Jericho fabric routers, which feature deep buffering and intelligent congestion-control capabilities for scale-across networking, capable of connecting AI clusters with over 200,000 compute nodes across multiple data centers.

Backed by strong demand for its custom silicon and Ethernet networking solutions, Broadcom expects its AI semiconductor to grow by 66% year over year to $6.2 billion in the fourth quarter of fiscal 2025.

The software business

Broadcom's high-margin software business is also gaining traction, with VMware accounting for almost 43% of its total revenue in the third quarter. Software revenue was up 17% year over year to $6.8 billion, driven by robust bookings. The business also had a gross margin of 93% and an operating margin of 77%.

The company has launched an integrated cloud platform called VMware Cloud Foundation version 9.0, which enables enterprises to run both traditional and AI workloads on-premises, in hybrid environments, or in the cloud. This provides a secure alternative to running workloads on the public cloud.

Financials

Broadcom's recent financials have been impressive. In the third quarter of fiscal 2025 (ending Aug. 3), revenues jumped 22% year over year to $16 billion, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin was a solid 67%. The company also generated free cash flow of $7 billion.

Broadcom is now guiding for revenue to grow 24% year over year to $17.4 billion and an adjusted EBITDA margin of 67% in the fourth quarter. This target seems easily achievable, considering that the company had a contracted backlog of $110 billion at the end of the third quarter.

Valuation

Broadcom shares currently trade at 39.7 times forward earnings, which is rich. This is especially so since the company's non-AI semiconductor business is showing only gradual recovery. The company's AI growth also depends heavily on four major hyperscaler clients. This customer concentration risk makes it vulnerable to any changes in the plans of these key clients.

The high valuation, however, also reflects investors' confidence in the company's exceptional execution capability, robust backlog, and critical role in AI infrastructure development. Hence, despite the risks, the stock appears to be a smart pick ahead of any potential future market rally.

Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.