Fantastic News for Broadcom Stock Investors

Broadcom (NASDAQ:AVGO) started the year on a strong note, with its shares rising significantly through the first six months of 2026 and reaching a 52-week high of $495. However, the semiconductor stock has dropped 27% from those levels and is up just 4% year to date, well below the S&P 500's 11% gains. Despite appearances, Broadcom has a lot going for it, and the company's most recent update suggests the market may be underestimating its prospects, making it a particularly attractive stock at current levels.

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Broadcom's Q3 update had one wrinkle

On Sept. 2, Broadcom released its financial results for the third quarter of its fiscal year 2026, which ended Aug. 2. The company performed well. Its revenue increased by 86% year over year to $29.6 billion. Broadcom's adjusted operating income soared by 92% year over year to $20.1 billion, while its adjusted earnings per share (EPS) were $3.32, up 96% compared to the year-ago period. Broadcom's revenue is growing faster than its expenses, a great sign for the business. Further, the company's free cash flow at the end of the period was $13.7 billion, up 95% year over year. Broadcom's artificial intelligence (AI) chip business is growing even faster.

It posted revenue of $16.7 billion, up 221% year over year -- Broadcom expects sales growth within this business to accelerate during its upcoming fourth quarter. But despite all that, the company's shares fell post-earnings. Some investors weren't happy with Broadcom's revenue guidance for the fourth quarter. The company expects $34.8 billion in revenue, slightly below Wall Street's projections. Broadcom's blistering growth was already factored into the stock price, which would fall at any sign of trouble, and that's what happened. But there is more to the story.

Looking beyond the fourth quarter

The question for long-term investors isn't whether Broadcom can exceed expectations in the near term. It's whether there are good reasons to think the stock will perform well over the next five years, at least. On the one hand, some remain skeptical that the AI market will continue expanding. The semiconductor industry has historically been cyclical, yet it has been on a sustained run for several years now.

Surely, it can't maintain its recent pace for that much longer. But there is a counterargument. While GPUs (Graphics Processing Units) were the defining hardware of the first wave of the AI boom, custom AI chips, which Broadcom helps design, are experiencing increasing demand. Custom chips offer several advantages to the companies that rely on them. First, they help them diversify away from Nvidia (NASDAQ:NVDA), the undisputed leader in the GPU market. Second, they tend to be cheaper, helping contain costs.

Custom chips aren't as versatile as Nvidia's GPUs, but they are effective for the specific workloads they are designed to handle. That's not to say companies such as the hyperscalers are no longer buying Nvidia's GPUs. But they are also increasingly relying on custom chips. That's why Broadcom has signed several long-term supply deals with companies such as Meta Platforms (NASDAQ:META) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL).

The latter has started selling AI chips to select customers, and if this business proves successful for Alphabet, it could double down on its partnership with Broadcom. Meanwhile, Broadcom is forecasting AI semiconductor revenue of about $115 billion in fiscal year 2027 -- that's more than the company's trailing 12-month revenue of $89.1 billion (which includes its infrastructure software segment). And, importantly, according to management, demand for Broadcom's AI chips currently exceeds the supply underpinning its outlook. In short, there are plenty of signs that Broadcom's AI tailwind isn't over yet, far from it. And that's great news for investors.

But the even better news is Broadcom's valuation. The company is currently trading at 19.3x forward earnings, versus an average of 20.2x for information technology stocks. At these levels, given Broadcom's outstanding financial results and the seemingly insatiable demand for its products, the stock looks like a strong buy.

Prosper Junior Bakiny has positions in Alphabet, Meta Platforms, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Broadcom, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.