Broadcom (AVGO): Evaluating Valuation After $10B AI Chip Win and Strong Q3 Performance

Broadcom (AVGO) just made waves with its third-quarter earnings, and the market's reaction was swift. The headline: a massive $10 billion order for custom AI chips from a new, unnamed customer, widely rumored to be OpenAI. This contract sent shares soaring over 12% in a single session and has investors debating whether this is just the beginning of a new growth trajectory for the company.

This run-up comes on the heels of consistently impressive results, as Broadcom’s mix of semiconductor and infrastructure software plays shine in the ongoing AI buildout. The company’s stock has outperformed this year, climbing close to 150% over the past twelve months, with much of the momentum fueled by breakthroughs in AI product sales and strong integration of VMware’s software business. Recent announcements, from large customer wins in cloud and retail to the debut of new AI-native infrastructure tools, are reinforcing Broadcom’s position at the heart of several major technology trends.

After such a sharp move and optimistic long-term outlook, is Broadcom now an attractive buy, or has the surge fully priced in the company's future growth story?

Most Popular Narrative: 12.7% Overvalued

The prevailing narrative sees Broadcom as trading above its fair value, with analysts projecting robust growth but flagging the current price as rich compared to future expectations.

Broadcom is investing heavily in R&D to push the envelope in AI technology, including creating next-generation accelerators like the industry's first 2-nanometer AI XPU packaging. This could significantly drive future revenue and margins through technological leadership and innovation.

What is the secret math behind Broadcom’s sky-high price? Analysts are betting on exceptional growth and future margins that rival the biggest names in tech. Think you can spot the single most aggressive assumption powering that price target? The full narrative reveals the numbers behind this optimistic call.

Result: Fair Value of $306.62 (OVERVAlUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, risks remain, including slowing growth outside AI and Broadcom's reliance on a few major customers. These factors could challenge the optimistic outlook.

Find out about the key risks to this Broadcom narrative.

Another View: Our DCF Model Tells A Different Story

While analysts believe Broadcom's price is too high, our DCF model takes a different approach. This method looks at future cash flows and currently suggests the shares are even more expensive. Which version should investors trust?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Broadcom for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Broadcom Narrative

If you’re skeptical of the consensus or want to dig into the numbers yourself, you can craft a personalized view using our tools. It takes just a few minutes. Do it your way

A great starting point for your Broadcom research is our analysis highlighting 2 key rewards and 2 important warning signs that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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