A favorable revenue mix, and higher Infrastructure Software and product revenues within the Semiconductor segment are expected to have driven an expansion of 100 basis points in the gross margin on a sequential basis. Broadcom expects an adjusted EBITDA margin of 66% in the to-be-reported quarter.

In the trailing 12 months, AVGO shares have returned 42.2%, outperforming the broader Zacks Computer and Technology sector’s return of 15.1% and the Zacks Electronics – Semiconductors industry’s appreciation of 15.2%.

The AVGO stock is not so cheap, as the Value Score of F suggests a stretched valuation at this moment.

In terms of the forward 12-month price/sales ratio, Broadcom shares are trading at 14.61X, higher than its median of 13.15X and the industry’s 7.45X.

AVGO’s long-term prospects are expected to benefit from the growing demand for AI infrastructure and the robust deployment of the GenAI portfolio. A solid portfolio is helping expand clientele that includes Alphabet and Meta Platforms. Its strong partner base, including Arista Networks, Dell Technologies, Juniper and Supermicro, has been a key catalyst.

Strong demand for Broadcom’s application-specific integrated chips (ASICs), designed to support AI and machine learning and make these tasks more efficient, aids top-line growth. Alphabet and Meta Platforms are notable users of Broadcom’s ASICs.

The acquisition of VMware has benefited Infrastructure software solutions. Since closing the acquisition, AVGO added more than 4500 of its largest 10,000 customers to VMware Cloud Foundation, which enables enterprises to deploy private cloud environments on-premise.

AVGO sees massive opportunities in the AI space as specific hyperscalers have started to develop their XPUs. Per the company, each of AVGO’s three hyperscalers plans to deploy 1 million XPU clusters across a single fabric by 2027. Serviceable Addressable Market for XPUs and network are expected between $60 billion and $90 billion for fiscal 2027 alone.

Broadcom’s focus on reducing its debt is noteworthy. The company paid off $2.81 billion of short-term debt in fiscal 2024, and $1.25 billion is due within the next 12 months. AVGO’s strong cash flow-generating ability is expected to help the company sustain its dividend payout, as well as lower its debt level simultaneously.

Broadcom’s strong portfolio, along with an expanding partner base, reflects solid top-line growth potential over the long run. We believe that these factors justify the premium valuation.

Broadcom currently has a Zacks Rank #2 (Buy), suggesting that it is the right time to buy the stock ahead of the first-quarter fiscal 2025 results. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Note: Sheraz Mian heads the Zacks Equity Research department and is a well-regarded expert of aggregate earnings. He is frequently quoted in the print and electronic media and publishes the weekly Earnings Trends and Earnings Previewreports. If you want an email notification each time Sheraz publishes a new article, please click here>>>

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