The company’s bet on AI is about to be put to the test

• Broadcom reports earnings after market close on Thursday.
• The company is trading up 85% year-to-date and made all-time highs on Monday.
• It’s a top 10 holding in numerous exchange-traded funds, and the earnings report will likely have a market-wide ripple effect.
• Growth in AI revenue and VMware integration are the two most critical components of the upcoming earnings call.

When you think about the 10 largest companies in the world, it’s likely the Magnificent Seven are the only ones that come to mind. Perhaps Berkshire Hathaway also makes the cut. But, rounding out that top tier of size is a stock that doesn’t get nearly enough attention relative to its $1 trillion market cap — Broadcom (AVGO). 

Broadcom is one of only 10 companies in the world to crack the elusive thirteen-figure market cap club, but investors tend to think more about Tesla (TSLA) or Berkshire Hathaway (BRK/A) — two firms with comparable market caps. Be that as it may, Broadcom is scheduled to report earnings Thursday after market close, and the market is pricing in a serious move. 

Broadcom’s critical earnings test

Broadcom has been on an absolute tear as of late, currently trading up 85% year-to-date and pushing firmly through to a new all time high this week. Much of that gain has come in the past two months, with shares climbing on the back of demand for semiconductors and on investors’ enthusiasm for AI infrastructure. 

This move is not unjustified — Broadcom has been capitalizing on the AI boom in a big way, particularly through custom AI chips and networking aids. The most recent development, the Tomahawk 6 switch, boasts 102.4 terabits per second of ethernet switching capacity. Analysts project Broadcom’s AI-related revenue to grow by 42% year-over-year in the upcoming quarter. 

Broadcom’s forward P/E ratio has expanded to about 30x, which accurately reflects greatly heightened investor expectations in recent months. This hasn’t scared off analysts, most of whom have recently hiked their price targets for AVGO to the $275-$295 range, still 10%-15% higher than its current levels.

The options market is pricing in an implied move of about 6.5% after this earnings call (more on that later), and investors will be watching most pointedly for updates on AI revenue growth, the integration process of the VMware acquisition, and guidance on future quarters. 

What analysts expect from Broadcom

Consensus analyst estimates for Broadcom’s Q2 report fall on earnings per share (EPS) of $1.57 and revenue of $14.97 billion, both marking a substantial increase year-over-year. Historically, Broadcom has a tendency to outperform these estimates, having beaten the EPS prediction in nine of the last 10 quarters. 

Historically, the semiconductor segment has accounted for around 75% of Broadcom’s revenue, and it is expected to remain dominant in this quarter. Investors will have their eyes on updates related to hyperscaler demand and custom AI chip development for major clients like Alphabet (GOOGL) and Meta (META). 

Broadcom has also been working to expand their infrastructure software segment, and the integration of VMware is anticipated to contribute significantly in that regard. Revenue estimates for VMware sit at over $2 billion for Q2. 

In their Q1 earnings report, Broadcom issued a forecast of $10 billion in AI-related revenue for this fiscal year. Any reaffirmation or upward revision to AI-specific guidance would likely be viewed very positively by investors. Conversely, indications of peaking or slowing AI demand could temper investor enthusiasm, regardless of quarterly results on their core numbers. 

Earnings call cheat sheet: What could move the stock

Five major factors could move AVGO after this earnings report:

• Growth in AI revenue and hyperscaler partnerships
• VMware integration and software segment performance
• Enterprise networking and inventory challenges
• Capital allocation and shareholder returns
• Forward guidance and market expectations

Growth in AI revenue and hyperscaler partnerships: Analysts anticipate Broadcom’s AI-related revenue will reach $4.42 billion, marking a 42% year-over-year increase and a 7% sequential rise. The company is collaborating with major hyperscalers, and that could significantly boost revenue streams. Investors will be looking out for updates. 

VMware integration and software segment performance: The integration of VMware is expected to contribute approximately $6.5 billion in revenue in Q2, reflecting growth of 23% year-over-year in the infrastructure software segment. Updates on the process of this integration and its impact on Broadcom’s recurring revenue model could definitely move the stock. 

Enterprise networking and inventory challenges: Broadcom’s non-AI semiconductor segments, particularly enterprise networking, are facing headwinds because customers are managing existing inventory levels. However, improvements in the server storage business are expected to offset some of these challenges. The degree to which they offset them is a factor that could move the stock. 

Capital allocation and shareholder returns: In April, Broadcom authorized a $10 billion share repurchase program, signaling confidence in the company’s financial position and prospects. Commentary on the pace of the buybacks and any potential adjustments to dividend policies have the potential to move the share price. 

Forward guidance and market expectations: Broadcom’s revenue guidance of $14.9 billion for Q2 is almost perfectly aligned with analyst expectations. Any updates or changes to this guidance during the earnings call could significantly influence investor sentiment and stock performance. 

How the market is positioning into Broadcom earnings

Broadcom is one of the top five AI-exposed semiconductor stocks, alongside Nvidia (NVDA), Advanced Micro Devices (AMD), Marvell Technology (MRVL) and Arm Holdings (ARM), which positions it as a key barometer for the strength of AI. If they beat expectations and raise guidance, it could trigger a bullish spillover into other AI-heavy names, particularly semiconductor stocks and software infrastructure companies. 

As a $1 trillion tech giant, Broadcom’s earnings report could also shape short term sentiment in tech-centric exchange-traded funds (ETFs) like XLK and QQQ. A beat-and-raise scenario could help sustain momentum in the current tech rally, while a miss may fuel profit-taking after this historic run-up. 

The options market is currently implying a 6%-7% move in either direction post-earnings, slightly above Broadcom’s historical average of 4.5%-5% in earnings weeks. With AVGO near all-time highs, it’s likely many traders will look to sell premium via short straddles or iron condors, while others may play directional breakouts with debit spreads or diagonals. 

Ultimately, this isn’t a call to buy or sell AVGO — just a look at what’s at stake for the company and the broader market as its earnings call looms. Whether you’re trading earnings season or simply observing, Broadcom’s report will likely ripple beyond just one ticker.

Gus Downing is host of the tastylive Network show Risk and Reward. @GainsByGus
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