Broadcom (AVGO)

Fabless chip and software maker Broadcom (NASDAQ:AVGO) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 20.2% year on year to $15 billion. The company expects next quarter’s revenue to be around $15.8 billion, close to analysts’ estimates. Its non-GAAP profit of $1.58 per share was in line with analysts’ consensus estimates.

Company Overview

Originally the semiconductor division of Hewlett Packard, Broadcom (NASDAQ:AVGO) is a semiconductor conglomerate spanning wireless communications, networking, and data storage as well as infrastructure software focused on mainframes and cybersecurity.

Broadcom’s peers and competitors in semiconductors include Analog Devices (NASDAQ: ADI), Cisco Systems (NASDAQ: CSCO), Intel (NASDAQ:INTC), MediaTek (TWSE:2454), Marvell Technology (NASDAQ:MRVL), NXP Semiconductors NV (NASDAQ:NXPI), Qualcomm (NASDAQ:QCOM), Qorvo (NASDAQ: QRVO), and Skyworks (NASDAQ:SWKS). Its software rivals are Atlassian (NASDAQ:TEAM), CrowdStrike (NASDAQ:CRWD), IBM (NYSE:IBM), Oracle (NYSE:ORCL), ServiceNow (NASDAQ:NOW), Splunk (NASDAQ:SPLK), and VMware (NYSE: VMW).

Chips need to keep getting smaller in order to advance on Moore’s law, and that is proving increasingly more complicated and expensive to achieve with time. That has caused most digital chip makers to become “fabless” designers, rather than manufacturers, instead relying on contracted foundries like TSMC to manufacture their designs. This has benefitted the digital chip makers’ free cash flow margins, as exiting the manufacturing business has removed large cash expenses from their business models. Read More. The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. Digital chips derive their processing power from the number of transistors that can be packed on an individual chip. In chip design, nanometers or “nm” refers to the length of a transistor gate – the smaller the gate the more processing power that can be packed into a given space. In 1965, Intel’s founder Gordon Moore famously predicted a doubling of transistors on a chip every two years. The concept, known as Moore’s Law, was based on his belief that the technology used to create semiconductors would improve continuously, allowing chips to become ever smaller and ever more powerful.

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Broadcom grew its sales at an incredible 20% compounded annual growth rate. Its growth surpassed the average semiconductor company and shows its offerings resonate with customers, a great starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. Broadcom’s annualized revenue growth of 27.6% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

This quarter, Broadcom’s year-on-year revenue growth of 20.2% was excellent, and its $15 billion of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 20.9% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 17.3% over the next 12 months, a deceleration versus the last two years. We still think its growth trajectory is attractive given its scale and suggests the market is baking in success for its products and services.

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Broadcom’s DIO came in at NaN,

In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Broadcom’s gross margin is one of the best in the semiconductor sector, and its differentiated products give it strong pricing power. As you can see below, it averaged an elite 75.5% gross margin over the last two years. Said differently, roughly $75.45 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

Broadcom has been a well-oiled machine over the last two years. It demonstrated elite profitability for a semiconductor business, boasting an average operating margin of 33.8%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Broadcom’s operating margin rose by 11.1 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Broadcom generated an operating margin profit margin of 38.8%, up 15.1 percentage points year on year. The increase was solid and shows its expenses recently grew slower than its revenue, leading to higher efficiency.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Broadcom’s EPS grew at a remarkable 22.8% compounded annual growth rate over the last five years, higher than its 20% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Broadcom’s earnings can give us a better understanding of its performance. As we mentioned earlier, Broadcom’s operating margin expanded by 11.1 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Broadcom reported EPS at $1.58, up from $1.10 in the same quarter last year. This print was close to analysts’ estimates. Over the next 12 months, Wall Street expects Broadcom’s full-year EPS of $5.84 to grow 24%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Broadcom has shown terrific cash profitability, and if sustainable, puts it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the semiconductor sector, averaging an eye-popping 41.3% over the last two years.

Taking a step back, we can see that Broadcom’s margin dropped by 10.2 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity.

Broadcom’s free cash flow clocked in at $6.41 billion in Q1, equivalent to a 42.7% margin. This result was good as its margin was 7.1 percentage points higher than in the same quarter last year. Its cash profitability was also above its two-year level, and we hope the company can build on this trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Broadcom’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 15.4%, slightly better than typical semiconductor business.

Broadcom reported $9.47 billion of cash and $67.28 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $37.4 billion of EBITDA over the last 12 months, we view Broadcom’s 1.5× net-debt-to-EBITDA ratio as safe. We also see its $1.62 billion of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

This was an in-line quarter, with revenue and EPS meeting expectations. Looking ahead, guidance for next quarter's revenue was also in line. The stock traded down 1.8% to $255.31 immediately after reporting.

Updated: June 14, 2025 at 10:18 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Broadcom, you should also grasp the company’s longer-term business quality and valuation.

Broadcom is an amazing business ranking highly on our list. First, the company’s revenue growth was exceptional over the last five years, and analysts believe it can continue growing at these levels. And while its cash profitability fell over the last five years, its admirable gross margins indicate robust pricing power. On top of that, Broadcom’s powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits.

Broadcom’s P/E ratio based on the next 12 months is 34.4x. Looking at the semiconductor space today, Broadcom’s qualities as one of the best businesses really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $280.59 on the company (compared to the current share price of $248.40), implying they see 13% upside in buying Broadcom in the short term.