Investments in AI infrastructure continue without break as major tech companies pour billions into building more data centers to power their cloud and AI services.

Thanks to its superior GPUs and accelerated computing solutions, Nvidia (NVDA) has emerged as the dominant player in this space.

However, the AI industry is not solely dependent on one player. The spending on generative AI (GenAI) expanded beyond Nvidia to include other key players in the semiconductor industry.

Broadcom (AVGO) is proving to be one of the strongest players in the AI revolution, continuing its momentum even as some of its peers struggle with market volatility.

Last week, the company reported a 25% year-over-year revenue increase in Q1, largely driven by a 77% jump in AI-related sales.

While many companies are trying to establish themselves in the AI space, Broadcom has already positioned itself as a crucial supplier to hyperscale data centers, and its latest results reinforce its dominance.

The company specializes in designing and producing custom semiconductor solutions, including application-specific integrated circuits (ASICs) tailored for AI workloads.

It supplies major tech giants like Alphabet, Meta, and ByteDance, all of whom are investing heavily in AI infrastructure.

CEO Hock Tan confirmed that Broadcom expects continued strength in AI revenue, with Q2 AI-related sales projected to grow another 44% year-over-year to $4.4 billion.

Unlike many semiconductor companies that rely on generalized chip designs, Broadcom’s ASICs offer highly specialized solutions that cater to the exact needs of large-scale AI workloads.

This has allowed the company to secure long-term partnerships with key hyperscalers.

Broadcom is also expanding its footprint in the data center connectivity space, where AI workloads demand high-bandwidth, low-latency networking solutions.

The company’s recent acquisition of VMware has further strengthened its revenue base, particularly in its infrastructure software segment. In Q1, infrastructure software revenue rose 47% year-over-year.

VMware’s transition from a perpetual licensing model to an annual recurring revenue system is expected to boost Broadcom’s margins over time.

All these factors combined enabled the company to achieve 66% Uniform return on assets ”ROA” last year.

However, the market is not oblivious to Broadcom’s performance and already has high expectations.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s ROA to improve to an incredible 142%.

Broadcom has solidified itself as one of the key beneficiaries of the AI revolution, with strong revenue growth driven by AI chip demand and a growing infrastructure software business.

Its ability to secure long-term contracts with major hyperscalers and the successful integration of VMware put it in a strong position for continued growth.

While the broader market faces volatility and some AI-related stocks have struggled, Broadcom has demonstrated resilience.

Its strategic focus on ASICs, data center connectivity, and software solutions ensures that it remains a critical player in AI infrastructure.

However, considering that Broadcom’s stock trades at all-time highs with 31.5x Uniform P/E and the market already expecting improved profitability, there might not be any upside left.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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