Broadcom's AI Revenue Is Exploding. Here's What Investors Should Watch Next.

Broadcom (NASDAQ: AVGO) is one of the fastest-growing AI chipmakers in the world, but it usually doesn't attract as much attention as Nvidia (NASDAQ: NVDA). Unlike Nvidia, which produces general-purpose GPUs for data centers, Broadcom produces customized AI accelerators (XPUs) for hyperscalers. When deployed at scale, Broadcom's XPUs can process AI inference tasks faster and more efficiently than Nvidia's stand-alone GPUs.

In fiscal 2025 (which ended last November), Broadcom's AI chip sales soared 65% to $20 billion, or 31% of its top line. In fiscal 2026, it expects its AI chip revenue to surge 186% year over year to $58 billion, or 55% of its projected revenue.

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But that could just be the beginning. Broadcom expects its AI chip revenue to nearly double to $115 billion in 2027 and double again to $230 billion in fiscal 2028. Assuming it hits those targets, analysts expect its revenue and EPS to grow at CAGRs of 62% and 78%, respectively, from fiscal 2025 to fiscal 2028. Those are incredible growth rates for a stock that trades at just 18 times forward earnings -- but investors should keep a close eye on its upcoming challenges.

What are Broadcom's biggest challenges?

Broadcom's AI business is firing on all cylinders, and it's bundling its other products -- including chips for Ethernet switches, optical interconnect components, and infrastructure software -- with its XPUs. That stickiness gives it tremendous pricing power and widens its defensive moat.

However, Broadcom could face intense macro and regulatory headwinds over the next few years. On the macro front, high interest rates could force AI companies to rein in their spending. On the regulatory front, the Democratic takeover of the House and Senate -- as well as five flipped governorships -- could force data center operators to stop expanding.

Texas governor-elect Gina Hinojosa already plans to suspend construction of new data centers in the Lone Star State -- and other states could soon follow suit. That pressure, which already crushed many AI stocks, could force Broadcom to reduce its long-term estimates.

To reduce its dependence on the AI market, Broadcom converted VMware's business model (which it acquired in late 2023) from perpetual licenses to recurring cloud-based subscriptions. However, the expansion of its infrastructure software business (which accounted for 30% of its revenue in its latest quarter) probably can't offset an abrupt slowdown in its AI chipmaking business.

Broadcom's stock looks like a bargain, especially after it declined more than 30% over the past six months, but only if you expect the AI market to keep expanding. If you expect AI spending to slow as macro headwinds intensify and the Democrats tighten their grip on data centers, it might be smarter to wait a few more quarters to see if its stock gets even cheaper.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Broadcom and Nvidia. The Motley Fool has a disclosure policy.