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