Broadcom's Post-Earnings Dip Is a Compelling Buying Opportunity

Broadcom (NASDAQ: AVGO) is in the middle of a correction after reporting solid results for its fiscal 2026 second quarter. Investors wanted more from a growth stock that was up by roughly 40% year to date before the report, and particularly wanted management to boost its outlook for its custom chip business. The post-earnings slide has brought the stock down by more than 20% from its peak, but that presents a compelling opportunity for long-term investors.

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Broadcom is gaining market share in the AI chip space

This correction looks out of line with the fundamentals that Broadcom reported. It delivered 48% year-over-year revenue growth in the quarter, which ended May 3. Profits almost doubled year over year as well, resulting in a 42% net profit margin.

Tucked away in the earnings report was the fact that the company's artificial intelligence (AI) chip revenue grew by 143% year over year to $10.8 billion. This part of the business represented almost half of Broadcom's Q2 revenue, and investors can expect accelerated revenue growth rates in the future.

Broadcom is gaining market share due to the growing popularity of its application-specific integrated circuits (ASICs), which are AI processors that are fundamentally different from the graphics processing units (GPUs) made by Nvidia (NASDAQ: NVDA) and others. While GPUs are flexible processors able to handle a wide range of computationally heavy tasks, Broadcom's ASICs are custom-designed in collaboration with each customer to handle only the narrow range of workloads those chips are expected to see. This makes them a more efficient and less costly option for those specific processing tasks.

Both companies work with the largest tech companies, but because of their differentiation, both can succeed in the AI chip space.

For instance, Advanced Micro Devices (NASDAQ: AMD) is another AI chipmaker that is doing well, but its GPUs compete directly with Nvidia's, and that's a hard battle to win. Broadcom caters to a different need among data center operators while benefiting from the broadly rising demand for AI chips.

Sequential growth is accelerating

A key theme among many AI stocks has been strong quarter-over-quarter growth. As sequential growth compounds, it can result in sizable year-over-year improvements that translate into prolonged stock rallies.

Broadcom pointed toward continued sequential momentum when it set its fiscal Q3 revenue guidance at $29.4 billion. That would be a 32.5% sequential improvement. The AI chipmaker continues to growth its top line each quarter, and that growth has been accompanied by higher net profit margins in recent years.

It's also not uncommon for Broadcom to exceed its guidance. For instance, management had previously told investors to expect $22 billion in fiscal Q2 revenue. When it came time to share results, Broadcom actually reported $22.2 billion in revenue.

The guidance it offered does not indicate that the company's growth is slowing. Broadcom is still gaining market share, suggesting its growth will accelerate in future quarters.

Broadcom's optimistic guidance is based on soaring capital expenditures in AI

Tech giants seem to be competing to spend the most on their AI infrastructure build-outs. Some Wall Street analysts believe that the total capital expenditures related to AI will exceed $1 trillion in 2027. A lot of that money will go toward buying AI chips and the necessary infrastructure to keep them running.

Broadcom's largest customers have been improving their fundamentals as well, and their AI expenditures are one reason why. For instance, in Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) first-quarter earnings release, CEO Sundar Pichai said that the company's AI investments have been "lighting up every part of the business." Google Cloud revenue surged by 63% year over year in the quarter, and the Tensor Processing Units it designed in partnership with Broadcom played a role in that momentum.

Alphabet isn't the only tech giant to have seen higher revenue and profits from its AI investments. Even Apple (NASDAQ: AAPL) is ramping up its AI investments after staying on the sidelines of the trend for a few years. Apple's higher R&D spending on AI will serve as another catalyst for Broadcom and other companies that are deeply integrated in AI infrastructure.

Tech companies are creating new businesses and optimizing their existing operations due to AI. As the tangible results of those efforts compound, demand for Broadcom's chips will increase further. With all that in mind, this month's short-term dip appears to ignore the long-term catalysts that set Broadcom up to continue outperforming the S&P 500.

Marc Guberti has positions in Apple and Broadcom. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Apple, Broadcom, and Nvidia. The Motley Fool has a disclosure policy.