The Broadcom Dip Is a Gift

A broader AI correction has gripped the stock market, resulting in high-growth companies trading at compelling valuations. Broadcom (NASDAQ: AVGO) was approaching $500 per share earlier in the year, but has now dropped by more than 20% from its all-time high.

The AI chipmaker didn't do anything wrong. Its fundamentals are actually improving, and long-term tailwinds continue to build. High-quality stocks can get caught in the crossfire from pessimistic investors, and that provides a great opportunity for people who buy the dip.

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Custom chips are becoming more important

Nvidia was the main focus early, with its graphics processing units (GPUs) handling general training tasks quite effectively. However, Broadcom's custom chips are better for AI inference and the optimization of very specific tasks, both of which are gaining importance.

Just as Nvidia is the undisputed leader of the GPU industry, Broadcom has a comfortable lead over its competitors in the ASIC industry. ASICs are custom chips, and tech giants have been in a rush to buy them lately. For instance, Alphabet is selling some of its Tensor Processing Unit (TPU) chips to customers. Broadcom designs and supplies Alphabet's TPUs, so it will generate more revenue as Alphabet ventures into this business.

Meta Platforms is also turning to Broadcom for custom AI chips. The name of these chips -- Meta Training and Inference Accelerator (MTIA) chips -- sounds like they will be exclusively for Meta Platforms. However, Facebook's parent company has been looking at other revenue streams to diversify its business. A potential neocloud segment has come up multiple times, and this type of thinking may result in Meta Platforms selling chips in the future. Those chips would be designed and supplied by Broadcom.

AI revenue continues to surge

These tailwinds also come with meaningful revenue growth right now. Investors aren't waiting for a backlog to materialize and accepting low growth rates right now. Broadcom posted 48% year-over-year revenue growth in its fiscal 2026 second quarter, but its AI semiconductor segment was the main highlight.

That part of the business brought in $10.8 billion, which is a 143% year-over-year increase. Since it represented almost half of Broadcom's total revenue, investors can expect meaningful revenue acceleration in future quarters, as long as AI demand continues to heat up.

Alphabet's decision to raise capital expenditures related to AI investments increases the likelihood of that scenario. As tech giants continue to compete with each other and record high profits, they make a stronger case for AI spending. This new technology presents a rare opportunity for many executives, and Broadcom is a pick-and-shovel play that should win regardless of which tech giant ends up on top.

Marc Guberti has positions in Broadcom. The Motley Fool has positions in and recommends Alphabet, Broadcom, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.