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Buy, Sell or Hold AVGO Stock: Key Tips Ahead of Q3 Earnings?

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Key Takeaways

  • Broadcom expects Q3 revenues of $15.8B, up 21% year over year with modest sequential growth.
  • AI revenues are projected to rise 60% to $5.1B, driven by hyperscaler investments in accelerators.
  • VMware's subscription shift and strong Cloud Foundation adoption are expected to lift software growth.

Broadcom (AVGO - Free Report) is set to report its third-quarter fiscal 2025 results on Sept. 4.

For third-quarter fiscal 2025, AVGO expects revenues of $15.8 billion. The Zacks Consensus Estimate for revenues is pegged at $15.83 billion, suggesting growth of 21.1% from the year-ago quarter’s reported figure.

The consensus mark for earnings has been unchanged at $1.66 per share over the past 30 days, indicating 33.9% growth from the figure reported in the year-ago quarter.

Broadcom’s earnings beat the Zacks Consensus Estimate in all the trailing four quarters, the average earnings surprise being 3.2%. 
 

Broadcom Inc. Price and EPS Surprise

Broadcom Inc. Price and EPS Surprise

Broadcom Inc. price-eps-surprise | Broadcom Inc. Quote

 

Let us see how things have shaped up for AVGO shares prior to this announcement.

Factors to Note Prior to Broadcom’s Q3 Earnings

Broadcom’s third-quarter fiscal 2025 guidance reflects sluggishness in server storage, wireless and industrial businesses. AVGO expects enterprise networking and broadband to continue to grow sequentially. Non-AI semiconductor revenues are expected to be around $4 billion, roughly flat sequentially. In fact, third-quarter fiscal revenue guidance suggests 21% year-over-year growth but indicates modest sequential growth. 

Gross margin is expected to decline roughly 130 basis points (bps) sequentially, reflecting a higher mix of XPUs with AI revenues. Broadcom expects an adjusted EBITDA margin of 66% in the fiscal third quarter, suggesting a 70 bps decline on a sequential basis.

However, Broadcom’s fiscal third-quarter performance is expected to have benefited from its expanding AI offerings. AVGO expects AI revenues to jump 60% year over year to $5.1 billion. Aggressive investments by hyperscaler partners on high-performance accelerators, as well as on AI data centers, are expected to have benefited AVGO’s performance in the to-be-reported quarter.

Broadcom expects semiconductor revenues to jump 25% year over year to $9.1 billion. Infrastructure Software revenues are expected to grow 16% year over year to $6.7 billion. The Zacks Consensus Estimate for fiscal third-quarter Semiconductor Solutions revenues is pegged at $9.11 billion, indicating 25.2% year-over-year growth. The consensus mark for Infrastructure Software revenues is pegged at $6.7 billion, indicating 15.6% year-over-year growth.

Strong results at VMware are expected to have driven top-line growth. Broadcom’s focus on shifting VMware products to a subscription-based model and growing adoption of VMware Cloud Foundation (87% of the largest 10,000 customers were shifted by the end of the second quarter of fiscal 2025) is expected to have driven top-line growth in the to-be-reported quarter.

AVGO Shares Outperform Sector

AVGO shares have returned 28.2% year to date (YTD), outperforming the broader Zacks Computer and Technology sector’s return of 12.9% and the Zacks Electronics - Semiconductors industry’s appreciation of 17%. AVGO has outperformed peers, including Cisco Systems (CSCO - Free Report) , Arista Networks (ANET - Free Report) , and Marvell Technology (MRVL - Free Report) , YTD. While shares of Cisco Systems and Arista Networks have returned 23.3% and 16.7%, respectively, Marvell Technology shares have dropped 43% over the same timeframe.

AVGO Stock’s Performance

 

Zacks Investment Research
Image Source: Zacks Investment Research

 

The AVGO stock is not so cheap, as the Value Score of D suggests a stretched valuation at this moment.

In terms of the forward 12-month price/earnings (P/E), Broadcom shares are trading at 37.05X, higher than its median of 36.09X, the industry’s 33.43X, the sector’s 27.63X, Cisco’s 17.03X, and Marvell’s 19.44X. However, Arista Networks shares are trading at a higher P/E multiple of 44.68X.

AVGO Stock’s Valuation

 

Zacks Investment Research
Image Source: Zacks Investment Research

 

Strong AI Portfolio Aids Broadcom’s Long-Term Prospects

AVGO’s long-term prospects are expected to benefit from the growing demand for AI infrastructure. Broadcom is benefiting from strong demand for custom AI accelerators (XPUs), which are a type of application-specific integrated circuits (ASICs) necessary to train Generative AI models. They require complex integration of compute, memory, and I/O capabilities to achieve the necessary performance at lower power consumption and cost. Alphabet and Meta Platforms are notable users of Broadcom’s ASICs.

AVGO sees massive opportunities in the AI space as specific hyperscalers have started to deploy its XPUs. Per the company, each of AVGO’s three hyperscalers plans to deploy 1 million XPU clusters across a single fabric by 2027. Broadcom expects a significant percentage of these deployments to be custom XPUs. The company expects accelerated demand for XPUs in the back half of 2026 as hyperscalers focus more on inference along with frontier model training.

Broadcom’s strong networking portfolio has been a key catalyst. The company is now shipping the Jericho4 Ethernet fabric router that has the ability to interconnect more than one million XPUs. Jericho4 helps Broadcom offer a complete portfolio of networking solutions, including the Tomahawk 6, Tomahawk Ultra and NICs. Strong demand for AI networking revenues, which jumped 170% year over year and represented 40% of AI revenues in the second quarter of 2025, has been a key catalyst. AVGO’s Ethernet-based AI networking enables one single fabric for both scale-out and scale-up architectures and hence is the preferred choice of Broadcom’s hyperscale customers.

However, a higher mix of lower-margin XPUs in the revenue mix is expected to keep gross margin under pressure throughout fiscal 2025.

Conclusion

Broadcom’s strong portfolio, along with an expanding partner base, reflects solid top-line growth potential over the long run. However, declining gross margin, a challenging macroeconomic environment, and stretched valuation make the stock a risky bet ahead of third-quarter fiscal 2025 results.

Broadcom currently has a Zacks Rank #3 (Hold), which implies that investors should wait for a favorable entry point to accumulate the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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