Broadcom (AVGO) – Follow-Up (March to Mid-May 2025)
Rating: Hold
Target Price: $230

Summary:
Broadcom Inc. (AVGO) has reached the $220 stock price target set in our March 2025 report, propelled by a confluence of macroeconomic tailwinds, semiconductor sector momentum, and company-specific catalysts. Key drivers behind this rapid ascent include a supportive Fed policy environment, surging demand for AI-related chips, and successful integration of VMware that boosted Broadcom’s financial performance. As of the latest developments, Broadcom’s strategy focuses heavily on integrating VMware to drive value through a combination of software and hardware solutions that aim to capture a larger share of the enterprise IT market.

Broadcom is still viewed positively, but short-term expectations are moderated after a strong 30% stock rally recently. The 12-month target price has been raised to $230 from $220, with a “Hold” rating for investors with a one-year horizon. However, recent stock gains and potential risks like macroeconomic setbacks and integration challenges suggest some near-term consolidation, likely around the low-$200s. Despite this, the long-term outlook remains optimistic.

1. Investment Thesis Update

AI Chip Demand Boom and New Product Plan: The semiconductor sector remained on fire in 2025, driven by insatiable demand for AI accelerators and data center chips. NVIDIA – often seen as the bellwether for AI hardware – reported astronomical growth, with revenue up 94% year-on-year in its latest quarter and analysts forecasting 50%+ growth for the coming year. This AI spending surge by cloud giants created a halo effect lifting all semi stocks, Broadcom included. Broadcom is carving out its own slice of the AI silicon market through custom application-specific integrated circuits (ASICs) and networking chips. In fact, Broadcom’s AI-related semiconductor revenues exploded in 2024 and continued to climb: during Q4 FY2024 its AI-driven sales surged 220% YoY to $12.2 billion, accounting for 41% of Broadcom’s semiconductor revenue in that quarter. By FY2024, AI-linked products (custom AI accelerators and data center connectivity) made up roughly 24% of total Broadcom revenue. This trend persisted into 2025 – in Q1, Broadcom disclosed that AI chip sales were a major contributor to growth, with management citing 77% YoY growth in AI-related sales (to $4.1 billion in Q1). The expectation that AI adoption is still in early innings (with a $60–$90 billion TAM for custom AI silicon by 2027) has fueled sector-wide optimism, supporting higher multiples for companies like Broadcom that have credible AI exposure. In 2025, news emerged that Broadcom is working on the world’s first 2 nm AI “XPU” – essentially a next-gen AI accelerator – in partnership with major cloud players. While details are scant, the prospect that Broadcom could leapfrog into ultra-advanced chip fabrication (2 nm process) for AI chips signaled its commitment to remain at technology’s cutting edge.

VMware Integration & Synergies: By May 2025, the VMware integration was largely on track, serving as a core catalyst for Broadcom’s re-rating. Management’s narrative on the Q1 call was that they are in the final stretch of transitioning VMware users to subscription models and that this transition has “revamped and revitalized” VMware’s financial profile despite initial pushback. Broadcom has aggressively cut costs at VMware (Hock Tan’s known playbook of leaner operations), reportedly halving VMware’s operating costs and driving margins dramatically higher. In fact, operating margins for the combined company have risen from under 30% pre-acquisition to ~70% post-integration – a staggering improvement highlighting synergies. These margin gains directly boost Broadcom’s cash flow and valuation. Investors now see the software business as a stable, recurring revenue engine to counterbalance the volatility of chips. Crucially, Broadcom demonstrated it could integrate a ~$61 billion acquisition without major hiccups. By May, ~70% of Broadcom’s top 10,000 customers had adopted the full VMware Cloud Foundation stack, indicating strong traction of Broadcom’s “full-stack” offering. The company also launched VMware Private AI Foundation in late 2024, positioning VMware’s platform to help enterprises run AI workloads on-premise using both CPUs and GPUs. This alignment of VMware’s software with the AI trend offers a compelling new growth avenue (e.g. Broadcom noted dozens of enterprise customers already piloting this AI-on-VMware platform). In short, Broadcom-specific execution – evidenced by synergy realization and linking VMware to AI opportunities – has been a vital driver for investor optimism in 2025.

Earnings Outperformance: Broadcom’s Q1 FY2025 earnings release on March 6 was a pivotal catalyst for the stock. The company not only beat consensus estimates (revenue of $14.92 billion vs. $14.61 billion expected; EPS of $1.60 vs. $1.49 expected) but also demonstrated that the VMware acquisition is boosting results more quickly than anticipated. As noted, revenue grew 25% YoY while operating metrics improved dramatically. Investors were particularly encouraged by Broadcom’s software segment performance: Infrastructure software (which now includes VMware) jumped to $6.7 billion in Q1, comprising nearly half of total company sales. This validates CEO Hock Tan’s strategy of transforming Broadcom into a hybrid semiconductor-software company. By bundling VMware’s virtualization products into enterprise subscriptions, Broadcom has substantially increased VMware’s revenue run-rate (VMware’s last independent quarter was ~$3.4 billion revenue, whereas under Broadcom it hit $6.7 billion in Q1). The cross-selling and pricing strategy – moving over 60% of VMware’s customer base from perpetual licenses to subscriptions – has paid off financially, albeit with some customer attrition (discussed under Risks). Broadcom’s ability to “beat and raise” in Q1 (they issued guidance implying continued growth) directly propelled the stock upward in March.

Geopolitical and Trade Factors: In April, U.S.–China trade tensions briefly rattled semiconductor stocks, including Broadcom. China announced retaliatory tariff hikes on U.S. goods to 125% (from 84%) in response to tech export restrictions, directly threatening Broadcom’s significant revenue exposure to China (~20% of sales). Concerns that higher tariffs could raise costs or dampen demand in Broadcom’s second-largest market led to a wave of analyst caution in mid-April. However, by May these fears abated when Washington and Beijing agreed to ease trade barriers as talks progressed. The U.S. rolled back some chip-related import tariffs to 30% for 90 days, and China reduced duties on U.S. products to 10%, marking a truce in the trade war. This détente sparked a relief rally: semiconductor stocks jumped 4–5% on May 12 as markets cheered the de-escalation. Broadcom’s share price, which had been weighed down by tariff worries in April, rebounded sharply on the tariff “pause”, highlighting how sensitive the stock remains to geopolitical news.

Investor Sentiment Shifts: The March–May period saw notable shifts in analyst sentiment, which in turn influenced institutional investor behavior. Right after Broadcom’s strong Q1 report, some analysts raised their targets or reiterated bullish stances. However, as macro risks emerged in April (tariffs, etc.), there was a temporary pullback in enthusiasm. By late May, as the trade situation improved, the sentiment skewed positive again. The consensus 12-month target by mid-May was around $229, which Broadcom’s price has now slightly exceeded, from undervalued to fairly valued. It means further upgrades may require new catalysts (like future earnings beats or clarity on tariffs). Broadcom’s shareholder return policies also catalyzed positive sentiment. In April 2025, Broadcom announced a $10 billion share repurchase program, signaling confidence in its cash flows and undervalued share price.

The table below summarizes the timeline of major developments from March to May 2025 and their impact on AVGO’s stock:

Date	Development	Impact on AVGO Stock
Mar 6, 2025	Broadcom reports Q1 FY25 earnings: revenue +25% YoY, EPS beat; strong VMware and AI growth.	Stock jumps on results, approaching $200 as investors price in improved outlook.
Mar 15–20, 2025	Fed meeting – interest rates held at 4.25–4.50%; Fed signals stable policy amid moderating inflation.	Supportive macro news lifts tech stocks; AVGO gains as lower discount rates justify higher valuation.
Late Mar 2025	AI sector buzz: NVIDIA projects 50%+ growth; Broadcom highlights custom AI chip wins (Google TPU).	Positive sector sentiment boosts AVGO; shares trade up in tandem with AI peers.
Early Apr 2025	U.S.–China tensions spike: China hikes tariffs to 125% on U.S. tech goods. Citi downgrades AVGO ($220→$210) citing trade risks.	Stock pulls back (~5–10%) into the $180s amid trade war fears and cautious analyst commentary.
Apr 26, 2025	Barclays cuts AVGO target $260→$215 on China risk; notes Broadcom’s 20% China exposure.	Sentiment dips further; AVGO underperforms as investors reassess worst-case trade scenarios.
May 7, 2025	Fed meeting – rates unchanged again; outlook steady. Broadcom ex-dividend date (quarterly $0.86 dividend).	Macro stability and dividend support help floor the stock around ~$200; buyers step in expecting Fed cuts later in year.
May 12, 2025	Trade truce announced: U.S. and China agree to temporarily cut tariffs (U.S. to 30%, China to 10%). Markets rally (~+3% Nasdaq).	AVGO surges ~5%+ in one day, from ~$210 to ~$220, as geopolitical overhang lifts; renewed momentum buying.
Mid-May 2025	AI enthusiasm crescendo: NVIDIA’s blowout earnings (continued AI sales strength) lifts semis; Piper Sandler reiterates AVGO as AI play ($250 target).	Broadcom stock breaks above $220, hitting new 2025 highs (~$230). Analyst sentiment shifts back to bullish, supporting further gains.
Late May 2025	Broadcom nears Q2 FY25 quarter-end; optimism that results will confirm AI & VMware strength. Consensus target rises to ~$230.	AVGO reaches ~$225–230, effectively achieving our prior 12-mo target in ~2 months. Market now prices Broadcom closer to fair value, with debate turning to upside vs. risks at these levels.

2. Q2 FY2025 Financial Performance (Preliminary Outlook)

Broadcom’s fiscal Q2 2025 covered the period Feb–April 2025, with results scheduled to be reported in early June (expected June 5–11, 2025). Ahead of the official release, analysts and the company’s guidance paint a picture of continued robust growth driven by both semiconductors and software.

Revenue and Growth Outlook: Broadcom guided for Q2 FY2025 revenue of about $14.9 billion, which represents ~19% year-over-year growth. This outlook is slightly above Wall Street’s consensus – analysts had pegged Q2 revenue around $14.7–14.8 billion, so Broadcom’s guidance implies a modest beat of the Street’s expectations. If achieved, $14.9B in quarterly sales would be roughly 3% sequential growth over Q1’s record $14.92B, and a new all-time high for Broadcom’s top line. Analysts also forecast a double-digit earnings jump: the Q2 consensus EPS is about $1.34 (non-GAAP), up 54% from $0.87 a year ago. Broadcom has a pattern of exceeding estimates – in Q1 it beat consensus by ~10% on EPS – so investors will be watching if it can continue that streak in Q2.

Segment Breakdown: The semiconductor segment is expected to contribute roughly $8.4 billion in Q2 (Guidance: +17% YoY). Growth here is heavily fueled by AI processor and networking sales: Broadcom projects AI-specific chip revenue of ~$4.4 billion in Q2, up an impressive 44% YoY. In other words, about half of chip revenue now comes from AI accelerators and related networking for hyperscalers. The remaining semiconductor categories (networking, storage, broadband, wireless, etc., excluding AI) are about flat to slightly down – Broadcom guided non-AI semiconductor sales around $4.0 billion for Q2, roughly offsetting declines in legacy products with the AI surge. Meanwhile, infrastructure software (Broadcom’s software segment, which includes VMware, CA, Symantec, etc.) is on track for approximately $6.5 billion in Q2 revenue, which would be +23% YoY. This growth rate has naturally slowed from the prior quarter’s +47% (since VMware is now in the year-ago base), but still reflects healthy expansion. The software segment’s run-rate is now in the mid-$20Bs per quarter, making Broadcom truly a half-chip, half-software company in revenue terms. As of mid-2025, the segment mix and performance indicate a well-balanced company, with semis providing scale and innovation, and software providing earnings stability and margin expansion. Broadcom’s successful integration of VMware has made its financial profile more resilient (less dependent on semiconductor cycles) while significantly boosting overall margins.

Profitability and Margins: Broadcom’s profit margins remain very strong in Q2. The company guided to an adjusted EBITDA margin of about 66%, comparable to Q1’s levels. Gross margins are expected to be roughly flat to Q1 (Broadcom noted a slight ~20 basis point sequential dip, due to mix shifts) – still in the high-70s percentage range overall. Segment-wise, software’s higher margins are lifting the consolidated average. In Q1, software gross margin was over 92% and operating margin ~76%, versus the semiconductor segment’s gross margin in the 70%+ range and op margin ~57-60% (by inference). For Q2, we can expect a similar mix: continued expansion in software profitability (as VMware cost synergies fully kick in) and stable chip margins. Notably, Broadcom’s Q1 operating income jumped +44% YoY to $9.8B, yielding an operating margin of ~66%. The Q2 results will likely show a continuation of >60% operating margins – exceptionally high in the tech industry – thanks to the combined effects of scale, the software pivot, and disciplined cost management.

3. Valuation and Investment Opinion

We apply a range of valuation methods to assess the intrinsic value of Broadcom (AVGO), incorporating both cash flow-based models and relative valuation multiples. The findings are as follows:

Discounted Cash Flow (DCF): Implied valuation is approximately $230 under the base-case scenario, with potential upside to $250 if we assume a lower WACC or higher terminal growth. This model assumes a 5-year FCF CAGR of ~17% and a WACC of ~10%.

Dividend Discount Model (DDM): Theoretical range is $280–$320, but a more practical multi-stage model suggests a value of $240–$250. We assign a lower weight to this method due to sustainability concerns around long-term high dividend growth assumptions.

Free Cash Flow to Equity (FCFE): Values AVGO at $220–$230, in line with the DCF. This reflects strong ongoing free cash flow generation, supporting dividends and debt repayment.

PEG Ratio (Forward): PEG is estimated at 1.5–2.0, using a forward P/E of ~30× and earnings growth of ~15–18%. This suggests that a significant amount of growth is already priced into the stock.

Peer Multiples (P/E, EV/EBITDA): Blended peer-based valuation yields $180–$200, assuming sector-average multiples (~15×). Broadcom trades at a premium due to its superior growth outlook and margin profile.

Final Valuation: Based on the weight of evidence across models, we assign a fair value estimate of $230 per share. While the current market price has already approached this valuation, we remain constructive on Broadcom’s long-term fundamentals and synergy realization from VMware.

Table: Broadcom valuation outputs via various methods, as of May 2025.

Valuation Method	Implied Value per AVGO Share	Notes
Discounted Cash Flow (DCF)	~$230 (base case); up to ~$250 (with lower WACC or higher growth)	Assumes 5-year FCF CAGR ~17%, WACC ~10% (sensitivity 9.5%), 5% terminal growth. Base-case DCF supports slight upside to current price.
Dividend Discount Model (DDM)	$280–$320 (theoretical); ~$240–$250 (practical multi-stage)	Very sensitive to growth ≈ cost of equity. Indicates high upside if 8–10% dividend growth sustained long-term. We weight this less due to sustainability concerns.
Free Cash Flow to Equity (FCFE)	~$220–$230	Equity cash flows (after debt repayments) discounted at 10% align with DCF. Reflects strong cash generation used for dividends & deleveraging.
PEG Ratio (forward)	Overvalued signal: PEG ~1.5–2.0	Using P/E ~30× and growth ~15–18%. Suggests current price already prices in a lot of growth (PEG > 1).
Peer Multiples (P/E, EV/EBITDA)	~$180–$200 (blended)	Broadcom trades at premium multiples (30×+ EPS, ~30× EBITDA) vs. sector avg ~15×. A peer-average valuation would imply a lower price, but Broadcom’s premium is partly justified by higher growth and margins.

Investment View: While Broadcom’s current share price has reached our target valuation—leaving limited room for downside cushion—this reflects a rational market repricing aligned with fundamentals. Broadcom’s fundamentals remain strong – robust free cash flow, a diversified business mix (semiconductors + software), and exposure to secular AI trends – supporting further upside over a long-term horizon. Further, Broadcom’s integration with VMware remains on track and is demonstrating early signs of successful execution, with visible progress in synergy realization and profit contribution. Therefore, we are raising our 12-month target price to $230 (from $220) and assigning a “Hold” rating to reflect higher confidence in AI-driven growth and a somewhat lower cost of capital as yields stabilize. This new target implies our expectation of the synergy to serve as a key growth catalyst. That said, we acknowledge the stock’s recent strength and advise vigilance toward risks (macro setbacks, integration hurdles, AI cycle volatility). In the near term, the stock may consolidate around the low-$200s given its rich valuation, but our long-term outlook remains positive as Broadcom’s cash generation, synergy execution in post-VMware integration, and strategic positioning in AI and enterprise software underpin further value creation.