AVGO: $16.7B AI Revenue — But Can Margins Keep Up?

D1ane
09-30

$Broadcom(AVGO)$ AI business is getting too big to ignore.

AI semiconductor revenue reached $16.7B in Q3, up an incredible 221% YoY and 54% sequentially. Broadcom expects another jump to $21.7B in Q4, up 236% YoY. 

But here’s the part I’m watching more closely:

Margins.

Broadcom’s overall gross margin fell 210 basis points sequentially to 75%, partly because AI semiconductors are becoming a much larger part of the business. AI revenue now represents 56% of total revenue, compared with 49% in Q2. 

At first glance, that sounds like a problem.

But operating margin tells a different story. It actually increased to 67.9%, up 240 basis points YoY, while non-GAAP EPS nearly doubled to $3.32.

So the debate isn’t really whether Broadcom can grow revenue.

It’s whether the incredible growth in custom AI chips can continue translating into earnings and free cash flow even if gross margins gradually come under pressure.

Broadcom generated $13.7B of free cash flow in Q3, equal to 46% of revenue. That’s a pretty important number when judging the quality of the growth. 

For me, the next phase of the AVGO story isn’t just about how many AI chips it can sell.

It’s about how profitable that growth remains.

Would you be comfortable with slightly lower margins if AI revenue and free cash flow continue scaling this 

Broadcom's $16.7B AI Engine Faces Margin Test — Is the ASIC Trade Still Attractive?
Broadcom (AVGO) rose 1.58% Tuesday as the market examined whether its $16.7 billion AI custom chip engine can translate surging ASIC order volumes into proportional earnings quality — the margin test is now the central debate. With a $16.7 billion AI engine now facing a margin test, is Broadcom's ASIC story a launchpad for further re-rating, or a revenue-growth-without-earnings-quality concern?
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

  • AbnerKeppel
    10-01
    AbnerKeppel
    46% free cash flow margin already says a lot about the quality here. I care more about whether that 67.9% operating margin can stay sticky as AI mix keeps rising
Leave a comment
1
19