The competition between Broadcom (AVGO.US) and NVIDIA (NVDA.US) has entered a new phase, with this semiconductor industry leader achieving record new orders in its recent earnings report. Moreover, Broadcom revealed that one of its four potential new hyperscale customers has entered production, prompting the company to significantly raise its fiscal 2026 AI revenue expectations.
While the market showed some disappointment with NVIDIA's earnings outlook, analysts were stunned by Broadcom's upward revisions. The magnitude of Broadcom's forecast adjustments suggests the business is positioned for multi-year growth in the coming years, providing a predictable outlook for further expansion in hyperscale customer operations.
However, investors should remain cautious. The market is not naive, and if you've been following Broadcom's developments, it's clear that CEO Hock Tan and his team are fully leveraging the growing influence of custom chips, which are becoming critical components for the most intensive and demanding training and inference workloads.
Notably, OpenAI's decision to partner with Broadcom, advancing from design phase to production stage, is encouraging news that could potentially bring over $10 billion in order growth for Broadcom. Given that Broadcom expects fiscal 2025 revenue to reach $63.4 billion, it's understandable that the market pushed Broadcom shares to new highs last Friday while NVIDIA and AMD stocks faced selling pressure.
**Broadcom: Revenue Acceleration Again in Fiscal 2026**
Broadcom's industry-leading profit margins confirm its ability to enhance operational leverage while expanding in the custom AI chip sector. Furthermore, Broadcom's fiscal 2026 performance estimates have quickly reflected its potential for renewed accelerated growth, supporting the bullish view following fiscal 2025 performance normalization.
Broadcom management emphasized that XPUs currently account for 65% of its semiconductor AI revenue base, while the record $110 billion order backlog has increased substantially due to rapid transformation driven by AI infrastructure growth.
Even more encouraging, Tan hinted that beyond OpenAI, another hyperscale enterprise might enter production in the future, bringing further enhancements for Broadcom from 2027 onward.
Broadcom's strong positioning in the overall AI market stems not only from robust demand for its XPU ASIC market but also from its Ethernet-standard-based AI networking technology, which positions it favorably in the expanding AI cluster ecosystem.
Despite facing competitive risks from NVIDIA's proprietary stack, Broadcom's incredible growth momentum and open Ethernet architecture, combined with its custom AI chips, can serve prominent and leading LLM customers seeking to diversify their dependence on NVIDIA's commercial chips and proprietary stack.
**Broadcom: How Many More XPU Deals Like This Will Happen?**
However, has market optimism about Broadcom gone too far? While the possibility of further upside surprises shouldn't be underestimated, consideration must be given to how many more OpenAI-related deals Broadcom can capture.
Hock Tan has clearly stated his focus on the hyperscale customer-centric custom chip market rather than overall AI infrastructure growth theories. Additionally, management has indicated that custom chips are expected to dilute Broadcom's overall profit margins, as custom chips will become increasingly important in the revenue mix over time.
Although higher-margin leverage in software and networking businesses can mitigate these effects, the faster growth pace of custom chips could still impact Broadcom's operational leverage gains.
Therefore, while current growth momentum alleviates market concerns about subsequent economic downturns, preparation is still needed for potential normalization phases in fiscal 2027.
Numerous hyperscale enterprises and frontier LLM leaders have the capability to drive Broadcom's custom chip prospects while possessing the necessary capital to enter qualified production stages. Given that Broadcom's valuation has reached its highest level in a decade, if growth subsequently shows signs of weakening, the stock's valuation would inevitably face downward adjustments.
**Buy or Sell Broadcom Stock?**
So, should one buy or sell Broadcom stock? Broadcom's expected EBITDA multiple has exceeded 31x, reaching 5-year and 10-year highs. Based on the scale of commitments Broadcom management has made regarding its AI revenue opportunities, it's clearly in a cyclical upswing.
But can this momentum really be trusted to continue indefinitely? Broadcom's Ethernet networking opportunity has consistently been a key growth driver for the company, although XPUs will increasingly contribute to Broadcom's revenue in the future.
Therefore, when AI infrastructure growth subsequently shows potential deceleration, the market may begin to face greater pressure. The risk/reward of further elevating Broadcom's P/E ratio to higher levels seems increasingly tilted toward the downside.
For investors who disregard potential slowdowns and expect valuations to soar to peaks, this approach lacks wisdom.
Taking all factors into consideration, a hold rating is maintained for Broadcom.