Broadcom Stock Pops as Earnings and Outlook Beat Expectations on Strong Demand for Custom Artificial Intelligence (AI) Chips

Shares of Broadcom (NASDAQ: AVGO) gained 12.8% in Thursday's after-hours trading, following the semiconductor and infrastructure software maker's release of its report for the first quarter of fiscal year 2025 (ended Feb. 2).

The stock's rise is attributable in part to the quarter's revenue and earnings, along with second-quarter revenue guidance beating Wall Street's expectations. In addition, the stock got a boost from very bullish comments CEO Hock Tan made on the earnings call.

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The relative strength of these catalysts can be teased out based on the stock's movement during after-hours trading. Shares had gained about 9% after the earnings release up through 5 p.m. ET, when the call started. They then shot up more than 7% about five minutes into the call (though eventually gave back some of this gain), which is when Tan shared news about the company's custom artificial intelligence (AI) chip business. His comments follow below.

Broadcom's key numbers

Data source: Broadcom. *Calculations by author, except for revenue growth, which the company provided in the earnings release. YOY = year over year. GAAP = generally accepted accounting principles. Fiscal Q1 2025 ended Feb. 2.

Investors should focus mainly on the adjusted numbers for operating and net income, which exclude one-time items.

Wall Street was looking for adjusted EPS of $1.51 on revenue of $14.6 billion, so Broadcom exceeded both expectations, with the profit beat quite comfortable. It also surpassed its own revenue guidance of $14.6 billion. And it beat its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) outlook of 66% of revenue, as this profitability metric was 68%. The company does not provide earnings guidance.

In the quarter, Broadcom generated cash of $6.1 billion running its operations, up 27% from the year-ago period. It generated free cash flow (FCF) of $6.0 billion, or 40% of revenue, up 28% year over year.

The company ended the quarter with cash and cash equivalents of $9.3 billion, essentially unchanged from the prior quarter, and long-term debt of $60.9 billion.

Segment performance

Data source: Broadcom. YOY = year over year.

Broadcom's November 2023 acquisition of VMware drove the revenue growth of the infrastructure software segment.

The semiconductor segment's revenue growth was driven by strong AI product growth, offset by continued weakness in non-AI products. AI semiconductor revenue surged 77% year over year to $4.1 billion. AI products include custom AI chips -- which are application-specific integrated circuits (ASICs) -- for hyperscalers and Ethernet networking products for AI data centers. (Hyperscalers are large tech companies that operate huge cloud data centers.)

CEO's bullish comments about the company's custom AI chip business

The following are CEO Hock Tan's comments on the earnings call that I referenced at the top of this article.

[W]e do reaffirm what we said last quarter that we expect these three hyperscale customers will generate a Serviceable Addressable Market, or SAM, in the range of $60 billion to $90 billion in fiscal 2027.

Beyond these three customers, we had also mentioned previously that we are deeply engaged with two other hyperscalers in enabling them to create their own customized AI accelerator. We are on track to tape out their XPUs this year.

[S]ince our last earnings call ... two additional hyperscalers have selected Broadcom to develop custom accelerators to train their next-generation frontier models. ... [T]hese four are not included in our estimated SAM of $60 billion to $90 billion in 2027.

Fiscal Q2 guidance

For the second quarter of 2025 (which ends May 4), management expects:

• Revenue of $14.9 billion, which equates to growth of 19% year over year.
• Adjusted EBITDA of 66% of projected revenue. For context, in the just-reported Q1, this profitability metric was 68%.

Going into the report, Wall Street had been modeling for Q2 revenue of $14.7 billion, so the company's revenue outlook was higher than this expectation.

In the earnings statement, Tan said the company expects "AI semiconductor revenue of $4.4 billion in Q2, as hyperscale partners continue to invest in AI XPUs [custom AI chips] and connectivity solutions for AI data centers."

In short, Broadcom turned in a strong report, and the information management shared on the earnings call is bullish for the company's future AI-powered growth.

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Beth McKenna has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.