Broadcom (AVGO) Earnings Preview: Can AI Revenue Justify Its Valuation?

Key Takeaways

• Broadcom’s fiscal Q3 results arrive Wednesday after market close, with analysts anticipating 90% EPS expansion to $3.22 and revenues reaching approximately $29.4 billion.
• Despite projections for roughly 70% earnings expansion both this year and next, AVGO shares have declined 30% from their June peak.
• AI chip sales are expected to reach $16 billion for Q3, representing year-over-year growth exceeding 200%.
• Marvell secured a partnership with Google for AI infrastructure chip design, potentially limiting Broadcom’s future revenue opportunities.
• Recent regulatory disclosures show Broadcom faces potential exposure to $29 billion in lease commitments should data center clients fail to meet obligations.

As Broadcom (AVGO) prepares to unveil its fiscal Q3 earnings results Wednesday afternoon, the semiconductor powerhouse faces heightened scrutiny. Currently priced at $[price], shares have tumbled 30% from their all-time high reached in June, despite Wall Street forecasting approximately 70% earnings expansion for both the current and upcoming fiscal years.

Broadcom Inc., AVGO

Financial analysts are projecting Q3 revenues of approximately $29.4 billion, marking an 85% year-over-year increase. Adjusted earnings per share are anticipated to land at $3.22, translating to 90% annual growth.

The critical metric for market participants will be AI semiconductor revenues. Following Q2’s impressive 143% surge to $10.8 billion in AI chip sales, company leadership has set expectations for roughly $16 billion in Q3. This would represent over 200% year-over-year expansion and nearly 50% sequential growth.

A substantial portion of this expansion stems from Broadcom’s specialized AI accelerators, designated as XPUs, alongside its Ethernet networking solutions. These technologies enable hyperscale cloud providers to construct massive AI computing infrastructures without depending exclusively on conventional GPUs.

Broadcom maintains strategic alliances with Meta, OpenAI, Google and Anthropic. The Meta collaboration encompasses a cutting-edge 2-nanometer AI processor, while the OpenAI partnership features a proposed 10-gigawatt infrastructure rollout and the recently unveiled Jalapeño Intelligence Processor.

The stock’s downward trajectory initiated following last quarter’s financial announcement. Despite marginally exceeding analyst estimates, Broadcom maintained its $100 billion 2027 AI revenue target without increasing it. Market participants had anticipated an upward revision, triggering a 13% single-day decline.

Marvell Partnership With Google Creates Uncertainty

In August, Google—Broadcom’s largest and most established AI client—formalized an agreement with Marvell Technology to engineer supplementary chips for its AI ecosystem. While Broadcom renewed its Google TPU chip arrangement in April, the Marvell collaboration introduces competitive pressure. This development constrains the breadth of prospective chip revenue for Broadcom moving forward.

The TPU collaboration with Google spans more than ten years, indicating the foundational partnership remains solid. Nevertheless, the Marvell announcement intensified investor apprehension approaching Wednesday’s earnings disclosure.

Financial Lease Exposure Introduces Additional Uncertainty

Recent regulatory filings revealed that Broadcom potentially faces up to $29 billion in lease commitment exposure should data center tenants default on their agreements. This situation connects to a financing vehicle established by Apollo and Blackstone designed to fund data center development utilizing Broadcom semiconductors.

Industry observers have characterized this structure as “circular financing,” raising questions about authentic demand fundamentals. While Broadcom’s exposure represents only a modest percentage of total anticipated investment, the revelation nonetheless unsettled market sentiment.

Within the software segment, VMware continues delivering solid performance. Infrastructure Software revenues climbed 9% year-over-year to $7.2 billion during Q2, with management projecting 31% growth to $8.9 billion for Q3, fueled by robust uptake of VMware Cloud Foundation 9.1.

Broadcom has exceeded earnings projections for 21 straight quarters, posting an average EPS beat of 2.19% across its most recent four reports.

AVGO presently commands approximately 18.9 times forward earnings for the upcoming year, marginally above the S&P 500 valuation multiple, while maintaining a Zacks Rank #2 (Buy) rating.