Freedom reiterates its “Buy” recommendation for Broadcom (AVGO) shares and raises the price target to $510. Relative to the share price at the time of writing of $357.16, the new target implies an upside potential of 42.8%. The main reasons for the revision were record quarterly results and supply-backed semiconductor revenue guidance for artificial intelligence for fiscal years 2027–2028.
Broadcom is a U.S. technology company that develops semiconductors and infrastructure software. Its products include custom AI compute accelerators, networking chips, optical components, and data storage solutions. The company’s software segment includes VMware products for managing enterprise computing infrastructure.
Broadcom revenue rose 85.5%
In the third quarter of fiscal 2026 Broadcom’s revenue reached a record $29.6 bn, up 85.5% year over year and 33.4% versus the prior quarter. The result topped the market consensus of $29.2 bn and Freedom’s estimate of $29.4 bn.
Adjusted earnings were $3.32 per share versus the market’s expected $3.22 and Freedom’s forecast of $3.25. Adjusted operating income increased 92.2% year over year to a record $20.1 bn.
Free cash flow, i.e., funds remaining after financing ongoing operations and capital expenditures, rose 94.5% to $13.7 bn. It amounted to 46.2% of quarterly revenue.
Broadcom did not repurchase its own shares in the reporting quarter. The company allocated $3.1 bn to dividends and repaid $5.6 bn of long-term debt. As a result, net debt decreased by 22% to $35.4 bn.
AI semiconductors drove the bulk of growth
Revenue in the semiconductor segment increased 127.4% year over year to a record $20.8 bn. Sales of AI solutions jumped 221% to $16.7 bn and accounted for most of the beat versus forecasts.
About 73% of AI segment revenue came from custom compute accelerators. Such chips are designed for a specific customer’s tasks—for example, training and running neural networks—so they can outperform general-purpose processors in performance and energy efficiency.
Sales of custom accelerators grew more than 3.5x year over year and reached approximately $12.2 bn. Broadcom earned another roughly $4.5 bn from networking solutions that connect thousands of processors into unified computing clusters.
Infrastructure software was the only segment that did not fully meet expectations. Its revenue totaled $8.75 bn, up 29% year over year, but came in below the market forecast of $8.82 bn.
AI revenue guidance reached $230 bn
Broadcom for the first time presented supply-backed targets for fiscal years 2027 and 2028. The company expects AI semiconductor revenue of about $115 bn in 2027 and approximately $230 bn in 2028.
Guidance for fiscal 2026 was raised from $56 bn to $58 bn. In the fourth quarter, the company expects to generate $21.7 bn in AI semiconductor revenue, which is 236% higher than a year earlier.
Freedom raised its forecast for Broadcom’s total revenue in fiscal 2028 by about 27% to $287.3 bn. The estimate for adjusted earnings was increased to $31.40 per share. Forecasts for 2026 and 2027 changed only slightly: in 2027, earnings are expected at $18.38 per share.
Margin pressure remains a risk
A growing share of custom accelerators with higher memory costs is putting pressure on Broadcom’s gross margin. In the third quarter, the adjusted figure declined by 2.12 percentage points versus the prior quarter to 75%.
At the same time, adjusted operating margin rose to 67.9% and exceeded the market forecast of 66.3%. Expense control and faster revenue growth allow Broadcom to offset most of the pressure on profitability, according to Freedom analysts.
By fiscal 2028, operating margin may remain in the high 65–66% range. The key risk is a further shift in the revenue mix toward less profitable semiconductor solutions.
Marvell’s partnership with Google intensifies competition
An additional risk is linked to Marvell Technology (MRVL) entering Google’s ecosystem of specialized processors. Marvell develops semiconductor solutions for data centers, networking infrastructure, and data storage systems. The company also builds custom chips tailored to the requirements of major technology clients.
Google’s parent company Alphabet (GOOGL, GOOG) has signed an agreement with Marvell to develop components for AI accelerators, memory controllers, and network interfaces. Alphabet develops search, advertising, and cloud services, as well as its own computing infrastructure for running neural networks.
As Freedom previously wrote, Marvell will not directly develop Google’s specialized processors; however, it will gain access to their ecosystem. This could increase pressure on Broadcom’s long-term share of Alphabet’s procurement and limit the company’s pricing power.
In the short term, Marvell’s partnership with Google does not threaten Broadcom’s business, but it is already affecting investor sentiment. Previously, Broadcom had remained Alphabet’s main partner in developing specialized accelerators.
Back in March, Freedom reported on Broadcom’s forecast that implied AI semiconductor revenue of more than $100 bn in fiscal 2027. The new $115 bn target and the first-time disclosure of the 2028 forecast increased visibility into future shipments and became the main reasons for raising the share price target to $510.
This is not an individual investment recommendation.