Broadcom's AI Revenue Is Exploding. Here's What Investors Should Watch Next.

Broadcom (AVGO) has seen a surge in its AI chip revenue, growing 65% in fiscal 2025 to reach $20 billion, which accounts for 31% of its top line. The company anticipates a substantial increase to $58 billion, or 55% of its projected revenue, in fiscal 2026, with AI chip revenue nearly doubling to $115 billion in 2027, and doubling again to $230 billion in fiscal 2028.

If these projections materialize, analysts predict revenue and earnings per share to grow at compound annual growth rates of 62% and 78% respectively over the same period. Given its current valuation of just 18 times forward earnings, Broadcom's stock appears to be an attractive investment. However, investors must monitor potential hurdles that could impact Broadcom's growth trajectory.

The company's AI business is thriving, and it is integrating other products, such as chips for Ethernet switches, optical interconnect components, and infrastructure software, with its AI accelerators (XPUs). This diversified product range enhances its pricing power and fortifies its competitive advantage. Nonetheless, Broadcom may encounter macroeconomic and regulatory challenges in the coming years.

Rising interest rates could lead AI companies to curtail spending, while the Democratic takeover of both the House and Senate, coupled with increased state-level regulatory actions, could potentially curb data center expansion. As a result, Texas' newly elected governor, Gina Hinojosa, has announced plans to halt the construction of new data centers within the state, a move that could reverberate across other states as well.

To mitigate its dependence on AI, Broadcom has shifted VMware's business model from perpetual licenses to recurring cloud-based subscriptions. While this diversification may help offset a sudden decline in the AI chip market, it is unlikely to compensate for a sharp slowdown in AI chip sales. Broadcom's stock seems to be a value proposition, particularly after a more than 30% price decline over the past six months.

However, if one anticipates heightened macroeconomic challenges and a looming Democratic influence on data centers, it might be wiser to wait and observe if the stock becomes even more affordable before making a move.