Rating: BUY | 12-M Price Target: $500 | Upside: +43% | Current Price: $350

Rating & Price Target

We have Broadcom as a Buy with our price target at $500 or 42.9% above current levels at $350. We think Broadcom is a great large cap tech company. They are exposed to AI datacenters, high margin software and generate large amounts of free cash flow.

There are multiple ways Broadcom can be tied to AI. They are involved with building custom AI chips, providing high speed network connectivity and optics. Cloud companies are able to use Broadcom's platform to create their own AI chip (aka ASIC or XPU). By creating custom chips cloud companies can optimize the chip for specific tasks and achieve higher power efficiency/cost compared to using a CPU. Broadcom also provides the ethernet switch that allows these AI chips to communicate to one another.

Another aspect to Broadcom is their acquisition of VMware. VMware is a large software company that allows enterprise to use private cloud, VM's, storage and network capabilities. Broadcom will also have exposure to AI through enterprise. Enterprise companies may want to build out there own AI solution at there facility instead of outsourcing everything to the public cloud.

Our price target of $500 assumes Broadcom is able to grow their AI semiconductor business at a high margin and grow VMware with minimal churn. Our biggest bear case would be if cloud companies slow down their AI spending or push back on their custom chip efforts.

Our View We think Broadcom is an attractive risk/reward at current levels. We can justify paying a premium for Broadcom given its exposure to AI, software revenue and large amount of free cash flow. Broadcom needs to continue to deliver on high expectations. We have a moderate conviction on this idea due to recent business updates. But we still have to assume AI growth continues.

About the Company

Broadcom consists of two divisions. Semiconductor Solutions and Infrastructure Software.

Broadcom's semiconductor solutions can be found in many different areas. AI Data Centers, Networking, Wireless, Broadband, Storage, Industrial and Automotive. These businesses can be cyclical as they rely on consumer, enterprise and telecom spending. However Broadcom has a large focus on growing their AI related products.

Some of Broadcom's products that are associated with AI are custom AI chips, ethernet, network switching chips and optics/connectivity. We think custom AI chips will play a bigger role in the AI ecosystem. Cloud companies will want to build custom chips to increase efficiency and cost savings. NVIDIA is currently the king of AI chips but companies will want to incorporate custom chips as well.

Infrastructure Software consists of VMware, Mainframe software, Security Software and other software products. We think VMware will be Broadcom's most successful product in this division. VMware will continue to be used in the enterprise sector for private cloud, storage, networking, security and VM capabilities.

Broadcom is working to get more VMware subscriptions/bundles. This could cause them to generate more revenue/margins but could upset some customers.

Our View: We think Broadcom has good mix of businesses. With the growth of AI they can grow revenue from their semiconductor side while software will help round out the recurring revenue and cash flow. This should be positive for Broadcom valuation. One thing to watch is if Broadcom loses VMware customers to competitors.

Financials

Broadcom showed us that AI can have a huge impact on their business in the last quarter. Broadcom came in with $29.6 billion of revenue in Fiscal Q3 2026. This was up 86% y/y. Broadcom also came in with adjusted EPS of $3.32 and GAAP EPS of $2.68. The reason for the difference is due to amortization from acquisitions, stock based comp, restructuring charges and other transactional charges.

They were able to generate about $13.7 billion of free cash flow in the quarter. Which will allow Broadcom to pay off debt, invest in their business and pay dividends.

AI semiconductor revenue was $16.7 billion in Q3. Which was up 221% y/y. Broadcom is guiding to around $21.7 billion of AI revenue next quarter. They also increased their AI revenue forecast for FY2026 to $58 billion. So Broadcom has now become an AI company in many aspects.

Broadcom still has many traditional businesses that can be cyclical. Broadband, Wireless, Industrial, Storage, Enterprise Network and Telecom. If consumers stop buying electronics or if companies cut spending on these products Broadcom can suffer. But they are growing fast enough from their AI products to offset any losses.

Because Broadcom does not have to make their chips they are not spending as much money. Broadcom also has VMware and other software products to generate cash.

Our View: We like Broadcom earnings quality because they are growing from demand. Broadcom has been able to generate large amounts of free cash flow while growing their business. Will AI continue to be this profitable? That's something to think about. But we think Broadcom management has done a good job so far.

Drivers

As we mentioned above Broadcom can grow from custom AI chips. Companies want to create their own custom chip to gain efficiency and save money. Broadcom will help them create these chips and will grow revenue from that.

Another area Broadcom can grow is network connectivity for AI. AI will require large amounts of network connectivity as all these chips talk to one another. Broadcom is a leading company in this space and will grow with AI.

Lastly Broadcom can grow from its optical business. As AI grows companies will need to move data from point A to point B. Broadcom should see growth here as well.

VMware will also help Broadcom grow. As we stated earlier some enterprise companies will want to build out their own AI solution. Broadcom can sell them VMware to help build that solution.

Our View: We think Broadcom can grow earnings from custom chips, AI network connectivity and selling VMware to enterprise. All good long term drivers for Broadcom.

Debt/Dividend/Risks

Broadcom has a great amount of free cash flow. Because they don't have to produce their own chips they don't need to spend as much money on cap ex. Broadcom can also generate cash flow from its software business. So they have plenty of ways to pay off debt and pay a dividend.

Broadcom ended the quarter with about $24 billion of cash and $59 billion of total debt. Most of this debt came from their acquisition of VMware. Broadcom is left with about $35 billion of net debt. This is a lot of debt but they should be able to pay it down with free cash flow.

Broadcom is paying $2.60/share annualized. They have grown their dividend for the past 15 years. Broadcom doesn't have a big yield but we like the fact that they continue to grow the dividend.

One risk we have is that Broadcom has a couple large customers that drive their AI revenue. If these companies decide to not create custom chips or slow down on AI spending Broadcom can lose some growth. Another risk is that Broadcom can lose VMware customers if they increase pricing to much or customers feel like they want to switch to another company.

Our View We think Broadcom can continue to grow their dividend and pay down debt with free cash flow. They can also reinvest money into research and development. Broadcom may also do share buybacks if they feel that makes sense. Broadcom's debt will limit their flexibility but we don't think its a huge concern. The only risk we have is if AI slows down. This could lead to Broadcom slowing down their earnings growth.

Conclusion

We like Broadcom as a Buy and have a PT of $500. Broadcom is a good combination of AI, semiconductors and free cash flow.

If you are looking to invest in Broadcom you should hold for a long period of time. Broadcom will benefit from AI growing, VMware doing well and Broadcom paying down debt. We think Broadcom will be a good company to own for the next several years.

Key Metrics to Watch

• AI revenue/guidance

• VMware revenue/customer churn

• Free Cash Flow/Net Debt