Broadcom (AVGO) Stock: J.P. Morgan Names Chip Giant Top Pick Despite 18% Drop

TLDR

• Broadcom stock dropped 18% over three trading sessions, its worst decline since March 2020, following disappointing earnings guidance
• J.P. Morgan named Broadcom their top semiconductor pick for 2025, setting a $475 price target
• Analysts project AI revenue will reach $55-60 billion in fiscal 2026, up from $20 billion in fiscal 2025
• Management warned AI business growth will compress gross profit margins by about one percentage point
• The custom chip market is growing at 40-45% annually, with Broadcom holding the number one market share position

Broadcom stock took a beating last week, but one major Wall Street firm sees the selloff as a buying opportunity.

The chip designer’s shares tumbled 18% through Monday’s close following its fiscal fourth-quarter earnings report. It marked the worst three-day stretch for the stock since March 2020.

Broadcom Inc., AVGO

But J.P. Morgan analyst Harlan Sur isn’t backing down. He doubled down on Broadcom as his top semiconductor pick for 2025, maintaining an Overweight rating and $475 price target. The stock closed Tuesday at $341.30, up 0.4%.

The selloff centered on margin concerns rather than weak sales. Revenue jumped 28% year-over-year to $18 billion in the fourth quarter. AI semiconductor revenue specifically surged 74%.

Management forecasts AI semiconductor revenue will double to $8.2 billion in fiscal Q1 2026. That’s the good news.

The bad news? Management warned that AI products carry lower margins than other business segments. Gross margin is expected to fall by one percentage point in the current quarter as AI becomes a larger piece of the pie.

Adjusted EBITDA will slip to 67% of revenue from 68% in the prior quarter. It’s a reality check for investors who had priced in perfect execution.

The company generated $26.9 billion in free cash flow during fiscal 2025. It returned $17.5 billion to shareholders through dividends and buybacks. Management also raised the quarterly dividend 10% to $0.65 per share.

AI Revenue Projections Drive Bull Case

Sur projects Broadcom’s AI revenue will hit $55-60 billion in fiscal 2026. That number could exceed $100 billion by fiscal 2027, up from around $20 billion in fiscal 2025.

The custom AI chip business sits at the heart of this growth story. Broadcom designs processors for major tech companies, including Google’s Tensor Processing Units.

J.P. Morgan estimates the high-end custom chip market at $30 billion annually. It’s growing at a compound annual rate of 40-45%.

Broadcom holds the top market share in this space. Marvell Technology ranks second. Sur expects both companies to benefit from the custom chip surge.

Questions swirled around Broadcom’s partnership with OpenAI after the earnings call. The companies announced plans to deploy 10 gigawatts of AI computing capacity using custom chips.

But Broadcom didn’t publicly name OpenAI as a major customer in its report. Sur remains unfazed. He expects the deal to ramp up from 2027 onward, generating up to $25 billion per gigawatt for Broadcom.

Valuation Concerns Linger

The stock trades at a forward price-to-earnings ratio of about 36. That’s a premium valuation for any company, let alone one facing margin pressure.

Broadcom’s $1.6 trillion market cap makes those cash flow numbers less impressive in relative terms. The valuation would be easier to justify if margins held steady during the AI ramp.

Non-AI semiconductor revenue is expected to stay roughly flat year-over-year in the current quarter. That puts enormous weight on AI products to drive growth.

Management believes the AI business will eventually deliver operating margin leverage as it scales. But that’s a longer-term story. Near-term margin compression remains a concern.

The custom chip debate continues between Broadcom-designed processors and Nvidia’s chips. Sur sees room for both companies to thrive. He views the AI infrastructure investment cycle as still in early innings, with trillions in spending ahead over the next several years.

Broadcom closed Tuesday at $341.30, down about 18% from recent highs near $414.

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