To The Moon

$Broadcom(AVGO)$

On April 8th, 2025, I issued a buy recommendation on Broadcom (NASDAQ: AVGO). At the time, the stock was trading around $150 per share. Since then, Broadcom’s stock has rallied significantly—surging to approximately $250 per share, even after a pullback in the aftermarket hours following the company's second-quarter earnings report released today.

This brings us to a critical question:

Is Broadcom still a buy after this run-up, or has the stock become overvalued?

In this video (or article), I’ll walk you through the most important elements of Broadcom’s latest earnings release, my updated financial model including a Discounted Cash Flow (DCF) valuation, a look at the company’s forward P/E ratio, and finally, I’ll update my recommendation to reflect the company’s new risk/reward profile.

Let’s dive into the numbers and what they mean for long-term investors.

Tracking the April 8th Buy Recommendation

First, some context. My April 8th buy call wasn’t made in a vacuum—I keep track of every recommendation I make. I believe in accountability and transparency, so I log every stock rating, whether it turns out to be a winner or not.

A lot of content creators only highlight their winners. I don’t. I circle back to all of my previous ratings—both good and bad—to provide updates and help you make better-informed investment decisions. That’s how you build trust in this space.

So, let’s revisit what made Broadcom so compelling back then, and why things look different now.

Broadcom Delivers Strong Q2 Results, Boosted by AI and VMware Synergies

Broadcom (NASDAQ: AVGO) reported its fiscal second-quarter earnings on Thursday evening, delivering results that exceeded expectations and issuing optimistic forward guidance—a reflection of the company's accelerating momentum in AI infrastructure and semiconductor innovation.

Thanks to its strategic expansion into AI networking chips and custom AI accelerators—key technologies used in data centers, smartphones, autonomous vehicles, robotics, and edge computing—Broadcom is benefiting from one of the most significant technological transformations in decades.

The company's $61 billion acquisition of VMware, finalized in 2023, is also beginning to yield tangible results. The integration of VMware's enterprise virtualization and cloud computing solutions has strengthened Broadcom’s position in AI infrastructure, allowing it to offer more comprehensive solutions to enterprise clients.

AI Growth Propels Broadcom to Record Sales

Broadcom posted record revenue of $15 billion in Q2 2025, a 20% increase year over year, and just above analyst expectations of $14.94 billion. The growth was fueled by a surge in demand for Broadcom’s AI semiconductor products and continued traction from the VMware segment.

• Semiconductor revenue: $8.4 billion, up 17% YoY

• AI semiconductor revenue: $4.4 billion, up 46% YoY

• AI now accounts for more than half of the semiconductor segment’s revenue

Within the AI category, Broadcom’s custom accelerator revenue grew by double digits, while AI networking revenue surged more than 170%, underscoring the rapid adoption of AI technologies and Broadcom’s critical role in enabling those capabilities.

Broadcom’s collaborations with Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), and Amazon (AMZN)—all of which are ramping up investments in AI infrastructure—further reinforce its position. These partnerships center around the development of custom accelerators designed to improve AI performance while reducing energy usage and total cost of ownership—key concerns for hyperscale data center operators.

VMware Integration Enhancing Broadcom’s AI Capabilities

The successful integration of VMware is playing a pivotal role in Broadcom’s growth strategy. VMware’s virtualization technology and cloud management platforms complement Broadcom’s semiconductor and networking businesses, allowing the combined entity to deliver end-to-end solutions for AI-powered data centers.

This synergy has become a cornerstone of Broadcom’s expanded enterprise offering, particularly as corporations shift toward hybrid cloud environments optimized for AI workloads.

Operational Efficiency and Earnings Consistency

Broadcom continues to impress with its operational execution. The company reported Q2 EPS of $1.58, beating the consensus estimate of $1.57 and marking a 43% year-over-year increase from $1.10 in the same quarter last year.

This quarter marks the 17th consecutive earnings beat and extends Broadcom’s remarkable track record of either meeting or exceeding consensus earnings estimates every quarter since November 2012—a streak that underscores the company’s consistent profitability and sound financial management.

Also highlighting Broadcom’s impressive operating efficiency, Q2 consolidated adjusted EBITDA rose 35% to $10 billion, keeping it on track for another record year in this regard after posting an adjusted EBITDA peak of $31.9 billion in 2024.  

It’s also noteworthy that Broadcom’s Q2 gross profit of $11.9 billion reflected a 79.4% gross margin, with the chip giant achieving a record gross profit of $39.7 billion last year on a 76.9% gross margin.

Broadcom Q2 2025 Financial Highlights

Broadcom reported Q2 revenue of $15.0 billion, representing a 20% year-over-year increase. This was roughly in line with analyst expectations and confirmed strong ongoing demand across its product portfolio.

• Operating cash flow: $6.55 billion

• Capital expenditures: $144 million

• Free cash flow: $6.41 billion

• Free cash flow yield: ~43%

These numbers are very strong. That kind of free cash flow yield is what initially attracted me to Broadcom. It’s rare to find companies growing revenues at 20% per year while also throwing off that much cash—especially when they’re returning it directly to shareholders.

But the story doesn’t end there.

AI Infrastructure Tailwind

The AI infrastructure boom continues to be a major driver of Broadcom’s business. The company announced that its AI-related revenues increased 46% YoY in Q2, reaching $4.4 billion, and are expected to hit $5.1 billion in Q3.

This would mark 10 consecutive quarters of AI-related revenue growth.

Broadcom is positioned as a key supplier to hyperscaler cloud companies like Amazon, Microsoft, and Alphabet, all of which are increasing capital expenditures at historic levels:

• Amazon: $105 billion forecasted CapEx in 2025

• Microsoft & Alphabet: ~$80 billion each

These investments are largely targeted toward expanding data centers optimized for AI workloads. Broadcom supplies high-end networking components that are critical for these infrastructures.

So this isn’t hype—it’s real demand from real customers, and Broadcom is delivering the infrastructure that enables it.

Asset-Light Business Model and Capital Returns

One of the most important aspects of Broadcom’s business is that it’s asset-light. As a fabless semiconductor company, Broadcom designs chips but doesn’t manufacture them directly. It outsources production to third-party foundries like TSMC.

This business model has several benefits:

1. Lower capital intensity

2. Higher scalability

3. More predictable margins

4. Fewer operational risks tied to manufacturing disruptions

Because Broadcom doesn’t have to constantly reinvest in manufacturing infrastructure, it can return more cash to shareholders.

And it did just that in Q2:

• $2.8 billion paid in dividends

• $4.2 billion in stock repurchases

• Total returned to shareholders: $7 billion in a single quarter

This is a textbook example of how capital-light businesses can compound shareholder value over time—when run well.

Updated Valuation: DCF and Forward PE

Now let’s talk valuation, which is where the story gets more complicated.

Discounted Cash Flow (DCF) Valuation

Based on my updated DCF model—factoring in the latest earnings and adjusted growth assumptions—I arrive at a fair value estimate of $163 per share for Broadcom.

With the stock now trading near $250, that’s a 53% premium to my intrinsic value estimate.

So even though the business is operating well, the stock price has run ahead of the fundamentals. Revenue and free cash flow are growing, but not fast enough to justify the dramatic increase in share price since April.

Forward Price-to-Earnings (P/E) Ratio

Using data from Finch, Broadcom is now trading at a forward P/E of ~38x, which is the highest it’s been since 2021. That’s not cheap—especially for a business that’s already scaled to this size.

We’re no longer looking at a stock priced for margin of safety. We’re now in the territory of valuation risk, where even solid execution might not be enough to generate outsized returns going forward.

Recommendation Update – From Borderline Buy to Hold

When I made my April 8th recommendation, I rated Broadcom as a borderline buy—meaning I saw more upside than downside, even if the margin of safety was thin.

But with the stock now up over 65% since then, and with earnings and free cash flow estimates not growing fast enough to justify that move, I’m downgrading Broadcom to a Hold as of June 5th, 2025.

Let me be clear: This is still a world-class company:

• Strong leadership

• Excellent execution

• Highly profitable

• Well-positioned in long-term secular growth trends like AI and cloud infrastructure

But at this price, the risk/reward skew has shifted. I’d love to own more Broadcom, but not at this valuation.

Summary

• Q2 results were strong: 20% revenue growth, 43% free cash flow yield

• AI demand remains robust, driven by hyperscaler spending

• Capital returns continue: $7B returned in Q2 alone

• DCF fair value: $163

• Current price: ~$250

• Forward P/E: 38 (highest since 2021)

• Updated rating: Hold (from borderline buy)

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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