One-Minute Overview
Thesis Pillars
AI Custom Silicon Leadership
Broadcom's XPU business is positioned at the center of hyperscale AI infrastructure buildout. Custom silicon revenue is tied to multi-year design-win cycles with large cloud customers, providing forward visibility that standard merchant chip suppliers do not have. Products revenue grows from $44.87B (FY2025A) to $67.27B (FY2026P, +50.0%) and $91.49B (FY2027P, +36.0%).
VMware Software Franchise
The VMware acquisition transforms Broadcom's software segment into a scaled, subscription-based platform with improving margins. Software gross margin recovered from 85.3% (FY2024A) to 90.8% (FY2025A). The transition from perpetual licenses to subscriptions creates a recurring revenue base the market has not fully capitalized.
FCF Generation & Deleveraging
Broadcom's combined model generates substantial and growing free cash flow. UFCF reaches $35.6B (FY2026P) and $47.3B (FY2027P), with cumulative 10-year UFCF of ~$718B. Debt/EBITDA declines from 1.9x (FY2025A) to 0.3x by FY2030P.
Variant Perception
Underwriting Conditions
- Hyperscale AI capex remains elevated through at least FY2027, sustaining demand for custom silicon (XPU) and networking
- VMware subscription conversion proceeds on schedule, with annualized booking value tracking toward management's $4B+ quarterly run-rate target
- Products gross margins remain at or above 73%, reflecting mix stability and pricing discipline across semiconductor segments
- No large acquisition materially alters the capital structure or diverts management focus from VMware integration and organic growth
- Effective tax rate normalizes to approximately 16.5% over the forecast period
Model Snapshot
Historical Financial Summary
| Metric | FY2023A | FY2024A | FY2025A |
|---|---|---|---|
| Revenue ($B) | $35.80 | $51.60 | $63.90 |
| Gross Profit ($B) | $26.80 | $39.50 | $50.20 |
| Gross Margin | 74.70% | 76.50% | 78.60% |
| EBITDA ($B) | $20.30 | $25.30 | $34.90 |
| EBITDA Margin | 56.60% | 49.00% | 54.70% |
| Net Income ($B) | $14.10 | $5.90 | $23.10 |
| Operating Cash Flow ($B) | $18.10 | $20.00 | $27.50 |
| CapEx ($M) | $452 | $548 | $623 |
| Total Debt ($B) | $39.20 | $67.60 | $65.10 |
Forecast Summary
| Metric | FY2026P | FY2028P | FY2030P | FY2035P |
|---|---|---|---|---|
| Revenue ($B) | $88.60 | $136.00 | $171.90 | $232.20 |
| YoY Growth | 38.70% | 18.80% | 10.80% | 4.40% |
| EBITDA ($B) | $46.70 | $72.00 | $91.60 | $123.30 |
| EBITDA Margin | 52.70% | 52.90% | 53.30% | 53.10% |
| Net Income ($B) | $29.50 | $53.80 | $74.10 | $109.60 |
| UFCF ($B) | $35.60 | $57.20 | $71.60 | $95.10 |
| Total Debt ($B) | $63.20 | $47.20 | $29.80 | $7.70 |
| Debt / EBITDA | 1.4x | 0.7x | 0.3x | 0.1x |
Segment Revenue
| Segment | FY2023A | FY2024A | FY2025A | % of FY2025 |
|---|---|---|---|---|
| Semiconductor Solutions | $28.90 | $35.00 | $44.80 | 70.20% |
| Infrastructure Software | $6.90 | $16.60 | $19.00 | 29.80% |
| Total Revenue ($B) | $35.80 | $51.60 | $63.90 | 100% |
Source: EQUITY RESEARCH PAPER (AVGO), Exhibits 5–6. FY ends in October. "P" = Projected. "A" = Actual.
Valuation Framework
The valuation blends four methodologies — an exit-multiple DCF (EMM), comparable company analysis via EV/EBITDA and EV/Revenue, and a perpetuity-growth DCF (PGM). WACC is 9.00%.
Sensitivity Analysis
Exhibit 8A: EMM Sensitivity — WACC vs. Exit EV/EBITDA (Blended Target Price)
| WACC \ Exit Multiple | 43.8x | 45.8x | 47.8x | 49.8x | 51.8x |
|---|---|---|---|---|---|
| 8.0% | $395.70 | $403.13 | $410.41 | $418.00 | $425.44 |
| 8.5% | $393.14 | $400.57 | $407.85 | $415.44 | $422.88 |
| 9.0% | $390.68 | $398.11 | $405.40 | $412.99 | $420.43 |
| 9.5% | $388.33 | $395.76 | $403.49 | $410.64 | $418.08 |
| 10.0% | $387.07 | $393.51 | $400.79 | $408.39 | $415.83 |
Exhibit 8B: PGM Sensitivity — WACC vs. Terminal Growth Rate (Blended Target Price)
| WACC \ g | 2.0% | 2.5% | 3.0% | 3.5% | 4.0% |
|---|---|---|---|---|---|
| 8.0% | $406.41 | $408.57 | $411.07 | $414.03 | $417.56 |
| 8.5% | $403.85 | $405.91 | $408.30 | $411.12 | $414.49 |
| 9.0% | $401.40 | $403.36 | $405.65 | $408.34 | $411.56 |
| 9.5% | $399.05 | $400.92 | $403.11 | $405.68 | $408.76 |
| 10.0% | $396.79 | $398.59 | $400.67 | $403.13 | $406.07 |
Source: EQUITY RESEARCH PAPER (AVGO), Exhibits 7–8B.
Key Risks
AI Demand Durability Risk
Hyperscale AI capex is cyclical. A slowdown in cloud spending or a shift in AI architecture away from custom silicon would reduce Broadcom's semiconductor growth trajectory.
Margin Mix Risk
As software (VMware) scales, the consolidated margin profile depends on the subscription transition sustaining high incremental margins. Any execution miss in conversion could compress blended margins.
Software Execution & Monetization Risk
VMware's transition from perpetual to subscription licensing involves customer friction. Slower-than-expected adoption, elevated churn, or pricing pushback could delay revenue recognition and margin realization.
Leverage & Capital Allocation Risk
Post-VMware acquisition leverage remains elevated near-term. An unexpected large acquisition or shareholder return policy that delays deleveraging could pressure the balance sheet and limit strategic flexibility.
Concentration & Supply-Chain Risk
Broadcom's AI semiconductor revenue is concentrated among a small number of hyperscale customers. Loss of a key design win or supply-chain disruption could disproportionately impact growth.
Valuation Compression Risk
The stock trades at a premium to semiconductor peers. A broad multiple de-rating or rotation away from AI-linked equities could compress the valuation even if fundamentals remain intact.