Excess Valuation Will Falter Amid Mounting Semiconductor Risks

Key Takeaways

• Broadcom faces rising volatility from dependence on a few AI customers and sector, with hyperscaler slowdowns or tech shifts threatening revenue and margins.
  
• Heightened geopolitical risks, export controls, and relentless sector competition put pressure on supply chains, margins, and earnings stability.
  
• Dominant position in AI semiconductors, growing customer base, strong software integration, technology leadership, and disciplined capital allocation strongly support sustained growth and profitability.

Catalysts

Designs, develops, and supplies various semiconductor devices and infrastructure software solutions worldwide.

• The dramatic acceleration in AI semiconductor growth may prove unsustainable as industry-wide capital intensity increases, making Broadcom heavily exposed to any slowdown in hyperscaler investments, which would drive a sharp deceleration in revenue growth and potentially leave the company with excess capacity.
  
• The concentration of AI semiconductor demand in just a handful of customers exposes Broadcom to high customer concentration risk, and any reduction in volumes or in-house chip development by these clients could trigger sudden and material revenue and net margin declines.
  
• The slow recovery and persistent weakness in non-AI semiconductor segments suggests that Broadcom is becoming increasingly dependent on a single, cyclical growth driver, raising the likelihood that future end-market downturns or a shift in technology priorities will intensify earnings volatility and compress gross margins.
  
• Rapidly rising geopolitical tensions and tightening export controls, especially between the United States and China, threaten to disrupt supply chains and could result in lost international business, higher compliance costs, and greater revenue unpredictability.
  
• Technological commoditization and relentless competition in networking and custom ASICs, coupled with the constant need for higher R&D and capex to maintain leadership, may erode pricing power, squeeze gross margins over time, and impair net earnings even if top-line growth continues.

Broadcom Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Broadcom compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Broadcom's revenue will grow by 17.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 31.4% today to 39.9% in 3 years time.
• The bearish analysts expect earnings to reach $38.3 billion (and earnings per share of $8.41) by about September 2028, up from $18.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 42.9x on those 2028 earnings, down from 83.7x today. This future PE is greater than the current PE for the US Semiconductor industry at 32.0x.
• Analysts expect the number of shares outstanding to grow by 0.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.19%, as per the Simply Wall St company report.

Broadcom Future Earnings Per Share Growth

Risks

• Continued explosive demand for AI semiconductors, evidenced by AI revenue surging 63 percent year-over-year for ten consecutive quarters and a record consolidated backlog of 110 billion dollars, suggests Broadcom is positioned for strong multi-year revenue growth due to lasting AI adoption and infrastructure spend.
  
• Expansion of the AI customer base from three to four large hyperscalers, with additional prospects in the pipeline and over 10 billion dollars in secured orders from a new customer for delivery in 2026, provides clear visibility into future revenue streams and reduces reliance on any single client.
  
• Successful integration and commercialization of VMware Cloud Foundation, with over 90 percent of the top 10,000 VMware customers purchasing the platform, supports long-term software margin expansion and recurring revenues, which should underpin higher net income and profitability.
  
• Proprietary leadership in custom XPUs and advanced Ethernet networking, including recent launches like Tomahawk 6 and Jericho4, ensures strong pricing power, technological differentiation, and the ability to win greater share of wallet from the world's largest AI infrastructure builders, benefitting both gross margin and future earnings.
  
• Robust disciplined capital allocation, demonstrated by a 7 billion dollar quarterly free cash flow, low capex spend, and increases in shareholder dividends, directly supports growth in earnings per share and overall shareholder value over the coming years.

Valuation

• The assumed bearish price target for Broadcom is $253.85, which represents two standard deviations below the consensus price target of $350.06. This valuation is based on what can be assumed as the expectations of Broadcom's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $416.0, and the most bearish reporting a price target of just $218.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $96.0 billion, earnings will come to $38.3 billion, and it would be trading on a PE ratio of 42.9x, assuming you use a discount rate of 10.2%.
  
• Given the current share price of $334.89, the bearish analyst price target of $253.85 is 31.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.