Broadcom’s July-quarter revenue rose 22% year over year to $16 billion, with $5.2 billion in artificial intelligence chip revenue rising 63% year over year. Management qualified a fourth custom AI chip customer, which it expects to drive an acceleration in AI revenue growth in fiscal 2026.

AI short- and long-term guidance significantly exceeded our expectations. Management expects up to $10 billion in incremental orders in the second half of fiscal 2026 from the new XPU customer, implying a nearly doubling of total AI revenue next year.

The $10 billion is wholly incremental to our prior forecast for 60% AI chip growth in fiscal 2026. Management indicated that the $10 billion in orders is just the beginning for its shipments to the new customer, which portends a rapid ramp-up to the level of other large customers, such as Google and Meta.

We see potential for even further upside for Broadcom’s XPU sales with three additional potential customers in talks with Broadcom. We surmise the new $10 billion customer might be OpenAI for an inference chip. We also believe Apple and Arm are part of Broadcom’s custom AI chip pipeline.

Raising our Fair Value estimate

We raise our fair value estimate for wide-moat Broadcom (NAS:AVGO) to $325 per share, from $225, from a materially increased long-term AI chip growth forecast that includes a revenue ramp for the new XPU customer. Shares look fairly valued to us at our new valuation.

Our forecast assumes an acceleration of growth in fiscal 2026, with tapering, but still substantial growth thereafter. Management hinted at another growth acceleration in fiscal 2027 that would imply significant further upside to our updated forecast and valuation.

Shares rose a relatively modest 4% after hours, which implies to us that significant AI revenue upside was already baked in. The stock trades at all-time highs, which now appears justified to us, given the accelerating AI chip revenue opportunity.

We came to the earnings call with expectations for 60% AI revenue growth through fiscal 2027, which is already impressive. Now, management has qualitatively guided to 100% growth in fiscal 2026 and a potential acceleration thereafter. We attribute the acceleration in fiscal 2026 (and potentially in fiscal 2027) to the ramp of new customers, with Broadcom’s initial three customers growing 60% in fiscal 2026.

We are modeling below management’s offhand 2027 acceleration comment, as we believe that would rely on qualifying a fifth customer, which hasn’t happened yet. If investors were to take management’s comments at face value, it would imply nearly $90 billion in total AI revenue in fiscal 2027, up from the $20 billion guidance for fiscal 2025. If this bull case bears out, there would be further upside to our valuation.

Astounding growth continues

Broadcom’s magnitude of growth continues to astound us, but the broader trend toward the adoption of custom XPUs and Ethernet networking aligns with our expectations. The pace and level of adoption have consistently and significantly exceeded our expectations. We believe XPUs offer large generative AI model builders higher performance, lower power consumption, and cheaper marginal costs.

While we still expect merchant GPUs from Nvidia (NAS:NVDA) to make up the majority of the market, we expect share gains for custom XPUs as more customers adopt custom chips for both training and inference.

Broadcom is by far and away the leading custom XPU vendor and is clearly gaining immense traction with customers. We believe its ability to create high-performing XPUs with its networking and processing chip design prowess is second-to-none. We also view its ability to match Nvidia’s rapid development cadence of new chips as a key differentiator.

Finally, CEO Hock Tan announced a renewed contract to keep him in his current role through 2030. We like the news. Tan has led Broadcom to become an AI chip leader, has struck massive, value-accretive acquisition deals (like VMware), and has transformed Broadcom into a tremendous generator of free cash flow. We do worry a little bit about key person risk and Tan’s age—he’ll be 77 when his contract is up in 2030. However, we believe Semiconductor president Charlie Kawwas appears to be a strong candidate off the bench for a succession plan.

Broadcom (NAS:AVGO)

  • Fair Value Estimate: USD $325
  • Morningstar Rating: ★★★
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: High

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Terms used in this article

Star Rating:Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating:Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock.Read more about business risk and margin of safety here.