Broadcom on Wednesday reported solid quarterly results and painted an increasingly positive outlook for the future of its custom AI chip business. The report showed that despite waning enthusiasm for Broadcom’s stock, the company’s most important businesses still have tailwinds. According to estimates compiled by LSEG, sales for the first quarter of fiscal 2026, which ended on February 1, were $19.31 billion, exceeding the consensus estimate of $19.18 billion and setting a record high. On a full-year basis, revenue increased 29%. Adjusted earnings per share (EPS) rose 28% to $2.05, also beating expectations of $2.03, according to LSEG data. Adjusted EBITDA for the quarter rose 30% to $13.13 billion, beating the FactSet consensus of $12.76 billion. A measure of operating profitability, EBTIDA stands for earnings before interest, taxes, depreciation, and amortization. AVGO 1Y Mountain Broadcom stock price over the past 12 months. Conclusion We may be just scratching the surface of what’s next for Broadcom. Yes, custom AI chip designers are already seeing incredible growth in this artificial intelligence boom. But Wednesday’s earnings call and conference call make it clear there’s more to come, as the world’s most important AI company looks to Broadcom to help build specialized chips to further its ambitions. The report hopes to alleviate at least some of the negativity surrounding Broadcom’s chip business. Specifically, some of Broadcom’s customers, like Google, may be looking to bring much of their silicon design process in-house, relying on so-called “customer-owned tools” (COTs) rather than Broadcom’s intellectual property. That concern is one reason Broadcom stock has struggled to gain traction this year. Chief Executive Officer Hock Tan said on a conference call that Broadcom will not compete with customer-owned tools “for many years to come.” His rationale is as follows. We are still in the land grab phase of the AI computing race, and customers who need specialized solutions need them fast and at high volume. In Tan’s words, “anyone can design a chip that works well in the lab.” But the hard part is working with third-party manufacturers like TSMC to ensure that the chips go into production smoothly and actually work after they’re manufactured. This is something that Broadcom is incredibly experienced at, probably more than anyone else in the world aside from Nvidia. Tan then had encouraging words about Broadcom’s relationship with Google, particularly the roadmap for future versions of Tensor Processing Units (TPUs). “For Google, we will continue our growth trajectory in 2026 due to strong demand for 7th generation Ironwood TPUs. We expect the demand for next-generation TPUs to further increase from 2027 onwards,” Tan said. Another concern limiting the upside for Broadcom, and by extension the club’s chipmaker Nvidia, is that the tech giant’s spending on building AI has peaked and will need to be cut in the coming years. Nvidia’s Jensen Huang disputed this last week. And on Wednesday night, Tan shed light on Broadcom’s customer spending intentions from 2026 onwards. The company didn’t seem worried about an exit, based on the demand it’s seeing and commitments from large key customers. The company’s “2027 outlook has improved dramatically”, Tan said. “In fact, we are now on track to achieve over $100 billion in AI revenue from chips alone in 2027, and we also have the supply chain necessary to achieve this.” A portion of this $100 billion forecast will come from OpenAI, which was confirmed as Broadcom’s sixth custom silicon customer late last year. The relationship appears to be progressing smoothly. OpenAI is expected to “massively deploy first-generation XPUs with over 1GW of computing power in 2027,” Tan said. XPU is an abbreviation for a custom chip recommended by Broadcom. Broadcom executives also cited major concerns about a short-term hit to gross margins in the second half of the year due to increased shipments of certain custom chips that contain many non-Broadcom components, such as memory. This topic was a big issue for Broadcom last time we reported on it in December, and was evident in the 11% decline in stock price on December 12th. In a phone call Wednesday night, Chief Financial Officer Kirsten Spears attempted to walk back that statement. “Upon further study, even relative to the comments I made last quarter, I don’t think the impact on our overall mix will actually be significant at all. So I’m not going to worry about that,” Spears said. This was positive, especially considering the 77% gross margin for the quarter reported Wednesday night was slightly lower than expected. Nevertheless, Broadcom’s operating margin expanded year-over-year and beat Wall Street expectations, thanks to better-than-expected sales and improved operating efficiency. As a result, that was reflected in profit growth. Also helping alleviate concerns about the reported quarter is management’s forecast for the current quarter. Tan said in the release that AI revenue growth is expected to accelerate. Meanwhile, finance chief Spears added that overall revenue growth will accelerate as well, exceeding Street expectations. Broadcom is projecting better EBITDA margins than the Street’s published model, so its earnings forecast will need to be revised upwards as well. In addition to the strong performance and positive outlook, management further demonstrated confidence in sustained demand by announcing a new $10 billion stock repurchase authorization. In summary, Broadcom has addressed the overhang issue surrounding its stock head-on, and the market has responded well to the extension, with the stock up about 5%. Bulls vs. bears debates usually take time to resolve, but this is a positive development in the bulls’ favor. We reiterate our 1 rating of Buy and $425 price target. Segment Commentary Semiconductor Solutions, by far the larger of the two business segments and the segment that Wall Street is watching closely because of its AI business, had sales of $21.52 billion, an increase of 52.4% year-over-year. That exceeded expectations of $12.4 billion, according to FactSet. AI semiconductor sales increased 106% year over year to $8.4 billion. This figure includes both custom chip revenue and AI networking products such as Ethernet switches that help tie data centers together. Custom chip revenue in particular increased 140% year-on-year in the quarter, and the momentum continued into the second quarter, Tan noted. For legacy semiconductor subunits, revenue for the fiscal first quarter was $4.1 billion. Revenue growth in enterprise networking, broadband, and server storage was offset by seasonal declines in wireless (as was the case after the iPhone launch, given that component orders are placed pre-launch). Revenue from Broadcom’s other business segment, infrastructure software, rose slightly from a year earlier to $6.8 billion, below the consensus estimate of $6.99 billion, according to FactSet. During the conference call, Tan said VMware’s revenue was up 13% year-over-year, adding that “we continued to see strong bookings as total contract booked in the first quarter exceeded $9.2 billion,” resulting in sustained annual recurring revenue growth of 19% year-over-year. Tan also sought to allay concerns that VMWare could be disrupted by AI, which has been a concern across the industry this year. VMWare’s virtualization software makes cloud computing possible. VMWare “cannot be disinterred or replaced,” Tan said. “In fact, this will enable enterprises to effectively scale complex generative AI workloads with an agility that hardware alone cannot provide. We believe the growth of generative AI and agent AI will increase the need for VMware, not less.”Guidance According to estimates compiled by LSEG, Broadcom expects total revenue for the current quarter (2Q) to be approximately $22 billion, up from the expected $20.5 billion. Well over $60 million. Importantly, AI revenue growth is expected to accelerate in the coming quarters, with the team forecasting AI revenue of $10.7 billion in the second quarter. Adding in the approximately $4.1 billion projected for the legacy semiconductor business, the outlook for the semiconductor solutions segment is $14.8 billion, well above the consensus estimate of $13.29 billion, according to FactSet. Infrastructure software revenue guidance was $7.2 billion, beating FactSet’s forecast of $7.13 billion. The company expects fiscal second-quarter adjusted EBITDA to be approximately 68% of expected revenue, or $14.96 billion, beating the FactSet consensus of 67.1% and $13.76 billion, respectively. (Jim Cramer’s Charitable Trust is long AVGO. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investing Club, you’ll receive trade alerts before Jim Cramer makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
