Broadcom Builds the Proprietary Side of AI — Part 2

AI revenue growth reinforces the industrial thesis on Broadcom. Valuation, price-embedded expectations and risks shape the stock's return profile.

This is the second and concluding part of our in-depth analysis of Broadcom. Following the examination of custom silicon, networking and partnerships developed in the first part, the focus now shifts to AI-related revenues, the expectations priced into the stock, and the risks that may affect its return profile.

The numbers behind the transformation

In the second fiscal quarter of 2026, Broadcom reported revenues of $22.187 billion, up 48% year-over-year. The semiconductor solutions segment generated $15.009 billion, a 79% increase, while infrastructure software contributed $7.178 billion, up 9%.¹

The decisive figure is AI semiconductors: $10.8 billion, up 143% compared with the same period of the prior year. The company attributes the growth to demand for custom accelerators and AI networking.¹

This means that, in the quarter, AI revenues accounted for approximately 48.7% of consolidated turnover and 72.0% of semiconductor revenues. These percentages are derived from a calculation based on official data and remain distinct from the metrics published separately by the company.

Broadcom also generated $10.262 billion in free cash flow, equivalent to 46% of revenues, and a non-GAAP diluted earnings per share of $2.44. For the third fiscal quarter of 2026, management guided for total revenues of approximately $29.4 billion and AI semiconductor revenues of $16 billion, representing projected growth of more than 200% year-over-year.¹

The following chart illustrates the acceleration in AI-related semiconductor revenues; the final bar represents guidance and remains distinct from actual results.

AI REVENUES

Broadcom: AI-related semiconductor revenues

Billions of dollars per fiscal quarter

The revenue composition chart shows that the AI component already accounts for nearly half of the quarter's consolidated turnover.

Key metrics, fiscal Q2 2026

AI now represents nearly half of quarterly turnover and is reshaping the group's financial profile. The software acquired through VMware continues to generate revenues and cash, but incremental growth is increasingly tied to AI infrastructure. This is a positive dynamic when demand accelerates; it can become a source of volatility if customer rollouts are delayed or if the product mix shifts.

In its 10-Q filing, Broadcom notes that inventory rose from $2.270 billion to $4.328 billion over six months, primarily to support the anticipated higher shipments of custom AI accelerators.²The figure is consistent with a phase of strong expansion, but it increases the importance of execution and the timeliness of deployments.

The part that the social media post oversimplifies

The industrial thesis leaves open the question of the stock's valuation and the premium embedded in current prices.

The model presented in the original post uses EPS growth of 24.2% over five years and a terminal P/E of 42.4 times. The mathematics may be correct, but the outcome depends almost entirely on two assumptions: Broadcom must continue to grow earnings at an exceptional pace and, at the end of the period, the market must still assign it a multiple in excess of forty times.

As of the measurement date of 1 July 2026, the stock was trading at $377.75. Summing the non-GAAP EPS for the last four available quarters — $1.69 in fiscal Q3 2025, $1.95 in Q4, $2.05 in fiscal Q1 2026 and $2.44 in Q2 — yields a trailing adjusted EPS of $8.13.^1151617

The ratio of price to adjusted EPS is therefore approximately 46.5 times. The metric constructs scenarios and remains distinct from the GAAP P/E. Broadcom's non-GAAP EPS excludes, among other items, stock-based compensation and the amortisation of acquisition-related intangibles.¹

The following table is a scenario exercise. It shows how the theoretical five-year return changes as EPS growth and the terminal multiple are varied. The calculation starts from a trailing adjusted EPS of $8.13 and a reference price of $377.75. The scope excludes dividends, changes in share count, personal taxes and future differences between GAAP and non-GAAP figures.

Five-year sensitivity matrix

In the matrix we observe how the theoretical return changes by combining three EPS growth assumptions and four terminal multiples.

The theoretical return remains sensitive to the combination of EPS growth and terminal multiple. With 15% growth and a terminal multiple of 25 times, the theoretical return would be modest. Achieving double-digit returns requires higher growth, a still-elevated multiple, or both conditions simultaneously.

The market reaction to the June results illustrates how demanding expectations have already become. Despite AI revenues rising 143%, the stock fell more than 14% in the subsequent session. Quarterly revenues came in slightly below the consensus cited by Reuters and the AI guidance of $16 billion was below the Visible Alpha estimate. Management also left the previous long-term 2027 target unchanged, even as it raised its gigawatt shipment forecast.¹²

The market demands from Broadcom both high growth and the continued surpassing of already exceptional expectations.

For the investor, what matters is the share of growth already priced in.

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What could break the thesis

Customer concentration

Broadcom discloses that its top five end customers accounted for approximately 45% of revenues in the second quarter of fiscal 2026. In the same period, a single direct customer in the semiconductor segment, identified as a distributor, intermediated 42% of revenue.²

The two percentages measure different perimeters. The 42% relates to a direct distributor and describes the channel, while the 45% aggregates the top five end customers. Concentration remains elevated and makes results sensitive to the decisions of a small number of hyperscalers and to the timing of their rollouts.

Competition involves Nvidia and other vendors

Marvell is looking to expand its custom business, and Reuters has reported talks with Google regarding new chips. Nvidia is also opening its architecture to semi-custom systems through NVLink Fusion. Market growth can support multiple vendors; the duration and exclusivity of agreements remain key variables.⁹¹³¹⁴

Mix may compress margins

Software carries higher gross margins than semiconductors. In its 10-Q, Broadcom notes that the greater weight of semiconductor products partially offset the benefits from growth and software mix.²

Furthermore, custom accelerators use expensive components, starting with HBM memory and advanced packaging. Very rapid revenue growth may be accompanied by more limited margin expansion.

Supply chain and execution

Broadcom depends on foundries, memory suppliers, packaging providers, and manufacturing partners. AI systems require a complex supply chain planned well in advance. A delay in the availability of HBM, advanced wafers, substrates, or networking equipment can shift revenues from one quarter to another.

The increase in inventory to support anticipated shipments confirms that the company is preparing for significant growth. At the same time, it makes any potential deferral of demand more costly.²

Stock-based compensation, dilution, and debt

Stock-based compensation amounted to $2.092 billion in the quarter. As of 3 May 2026, Broadcom also had $20.106 billion in costs related to equity awards to be recognised over a weighted-average remaining period of three years.²

This item coexists with the capacity to generate cash and warrants attention when using adjusted EPS figures that exclude it.

The company held $19.628 billion in liquidity and had aggregate principal debt payments of $66.720 billion. Free cash flow generation makes the debt manageable under current conditions, but interest payments, acquisitions, buybacks, and dividends remain significant components of capital allocation.²

The AI investment cycle

The thesis ultimately depends on the continuity of hyperscaler capex. Custom projects require very high volumes and multiple product generations to fully realise the promised economics. A slowdown in demand, a shift in model architecture, or reduced availability of power and data centre capacity could extend payback timelines.

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The new infrastructure will be hybrid

The thesis on Broadcom coexists with Nvidia's leadership and the continued use of GPUs.

It requires only that a growing portion of AI infrastructure becomes proprietary, specialised, and more dependent on networking. Every workload shifted to a custom XPU expands the custom silicon market. Every cluster that increases the number of accelerators makes networking, optics, packaging, and interconnects more important.

This transformation is already visible in the agreements with OpenAI and Meta, in the relationship with Google, and in AI revenue growth. Yet the same evidence that underpins the industrial thesis has led the market to assign Broadcom very high expectations.

The conclusion concerns Broadcom's privileged position in one of the most significant shifts in contemporary technology infrastructure, while the stock's valuation remains tied to the expectations embedded in the price.

Investor returns will depend on the pace at which Big Tech builds more custom chips, on the share of growth Broadcom is able to capture, and on the multiple the market assigns to custom silicon once it becomes a standard component of data centres.

Broadcom is establishing its role as a technology partner for the development of the proprietary portion of its customers' infrastructure alongside Nvidia.