Broadcom Shares Surge on New AI Chip Customer Announcement. Is It Too Late to Buy the Stock?

Key Points

• Broadcom saw strong AI revenue growth in its latest quarter.

• However, the bigger news was a new $10 billion custom chip order from a new customer.

• The company has a huge AI chip opportunity still in front of it.

• 10 stocks we like better than Broadcom ›

Broadcom (NASDAQ: AVGO) shares surged following its fiscal Q3 earnings report after the company revealed that it has a new $10 billion custom artificial intelligence (AI) chip customer. While Broadcom did not immediately identify the new customer, Wall Street analysts predict it is likely OpenAI.

With the stock trading up more than 45% on the year, let's take a closer look at Broadcom's most recent results and future AI opportunities to see whether it's too late to buy the stock.

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Strong results and a big order

Broadcom got into the custom AI chip business when it helped Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) develop its highly regarded tensor processing units (TPUs), which are designed to optimize performance within its TensorFlow framework. These chips help Alphabet's cloud computing unit, Google Cloud, lower costs and improve performance compared to competitors that are only using off-the-shelf graphic processing units (GPUs).

Not surprisingly, Alphabet's TPU success led to more custom AI chip customers for Broadcom. Developing custom chips takes time, but the company previously boasted that its three customers furthest along (believed to be Alphabet, Meta Platforms, and ByteDance) represent a $60 billion to $90 billion serviceable addressable market (SAM) opportunity in fiscal year 2027. However, the company got investors excited when it said that a fourth customer placed an order topping $10 billion, which will significantly boost its fiscal 2026 growth.

Now, it was widely reported that OpenAI was working with Broadcom last year on developing custom AI chips. However, the production of those chips appears to be happening more quickly than expected. Apple (NASDAQ: AAPL), meanwhile, is a newer customer that is behind the other four.

Broadcom's three primary custom AI chip customers helped drive growth in fiscal Q3. AI revenue soared 63% to $5.2 billion, with custom chips accounting for 65% of the total. That compared to 60% of the total last quarter, when AI networking revenue helped lead the way. The company said AI networking remained strong, as customers continue to scale up.

Broadcom's overall revenue jumped 22% year over year to $15.96 billion in the quarter, while adjusted earnings per share (EPS) soared 36% to $1.69. The results surpassed analyst expectations for adjusted EPS of $1.65 on revenue of $15.83 billion, as compiled by LSEG. Adjusted EBITDA, meanwhile, climbed 30% year over year to $10.7 billion.

Total semiconductor solutions revenue rose 26% year over year to $9.2 billion, as its non-AI chip revenue continues to be sluggish. Infrastructure software revenue, meanwhile, rose by 17% to $6.8 billion. The segment also saw a big boost in margins, with gross margins rising to 93% from 90% and operating margins climbing to 77% from 67% now that the VMware acquisition has been fully integrated.

Broadcom continues to produce strong cash flow, with cash flow from operations coming in at nearly $7.2 billion and free cash flow of $7 billion. It ended the quarter with nearly $10.7 billion in cash and equivalents and $64.2 billion in debt, which stems from its $69 billion acquisition of VMware in 2023.

Looking ahead, Broadcom forecasts fiscal Q4 revenue to increase by 24% to $17.4 billion, with semiconductor revenue climbing 30% to $10.7 billion and infrastructure software revenue rising 15% to $6.7 billion. Within semiconductor revenue, it expects AI semiconductor revenue to surge 66% to $6.2 billion. It is looking for adjusted EBITDA to be about 67% of revenue, or about $11.7 billion.

Can the stock keep its momentum?

Broadcom has a huge custom chip AI opportunity in front of it, and the announcement that a fourth customer has secured over $10 billion of orders scheduled for the second half of fiscal 2026 only crystallizes that further. That number is actually pretty massive, considering the company is only on track to generate around $13 billion in AI chip revenue this fiscal year (estimated by taking 65% of its $20 billion AI revenue forecast), with one quarter left in its fiscal year.

Now there is a question of how export controls could impact providing custom chips to one of its suspected original three customers, TikTok owner ByteDance, but OpenAI would more than make up for that if, for some reason, it was not permitted. Meanwhile, it does seem likely that U.S. companies will again be able to sell AI chips to Chinese companies in the future. The pace at which OpenAI developed its custom chips also points to Apple potentially adding to revenue much sooner than expected, as well.

From a valuation perspective, Broadcom now trades at a forward price-to-earnings (P/E) ratio of about 40.7, based on fiscal 2026 analyst estimates, which on the surface is not cheap. However, given its strong growth outlook, it has a price/earnings-to-growth ratio (PEG) of around 0.5. Stocks with PEG ratios below 1 are typically considered undervalued.

Broadcom appears to have one of the biggest AI infrastructure opportunities still in front of it, so I don't think it's too late to buy the stock.

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Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Apple, and Meta Platforms. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.