3 Reasons Why the Broadcom Stock is a Buy Despite 17% YTD Dip

Broadcom AVGO shares have dropped 17.3% year to date (YTD). The company has been suffering from the ongoing sell-off in technology stocks amid rising fears of a recession following U.S. President Donald Trump’s decision to levy tariffs on top trading partners, including China, Mexico and Canada, which has increased the chances of a trade war. Technology companies, including Broadcom, import key parts to international markets, which makes them vulnerable to a trade war. However, we believe the dip offers a massive opportunity for investors to buy the stock. Growth-oriented investors should ignore the near-term hiccups due to an innovative portfolio and rich partner base, solid VMware business and strong balance sheet as well as free cash flow generating ability. Let’s dig deep to find out more.AVGO Stock’s Performance Image Source: Zacks Investment Research Strong Portfolio to Boost Broadcom’s ProspectsStrong demand for Broadcom’s application-specific integrated chips (ASICs), designed to support AI and machine learning and make these tasks more efficient, aids top-line growth. Alphabet GOOGL and Meta Platforms META are notable users of Broadcom’s ASICs. Custom AI accelerators (XPUs), which are a type of ASICs, are necessary to train Generative Artificial Intelligence (GenAI) models, and they require complex integration of compute, memory, and I/O capabilities to achieve the necessary performance at lower power consumption and cost. Broadcom strengthened its AI portfolio with the launch of the industry’s first Face-to-Face (F2F) 3.5D XPUs. 3.5D integration combines 3D silicon stacking with 2.5D packaging. Broadcom’s F2F offers better interconnect density (seven times increase in signal density) and power efficiency (10 times reduction in power consumption in die-to-die interfaces) compared with the Face-to-Back approach.AVGO’s innovative portfolio is a key catalyst. The company’s next-generation 3-nanometer XPUs are the first of its kind to market in that process node. Broadcom is on track for volume shipment at hyperscale customers in the second half of fiscal 2025. AVGO is now planning to develop the industry’s first 2-nanometer AI XPU packaging 3.5D and targets scaling clusters of 500,000 accelerators for hyperscale customers.AVGO sees massive opportunities in the AI space as its three hyperscaler customers have started to develop their own XPUs. It believes that by 2027, each of AVGO’s three hyperscalers plans to deploy 1 million XPU clusters across a single fabric. Serviceable Addressable Market for XPUs and network are expected to be between $60 billion and $90 billion in fiscal 2027 alone. The company has expanded its clientele with the addition of four new hyperscalers (although AVGO considers them as partners currently).Broadcom’s rich partner base, including NVIDIA NVDA, Arista Networks, DELL, Juniper and Supermicro, has been a key catalyst. These factors are expected to drive strong AI revenues. AVGO expects second-quarter fiscal 2025 AI revenues to jump 44% year over year to $4.4 billion. Semiconductor revenues are expected to surge 17% year over year to $14.9 billion.VMware Buyout Drives AVGO’s Infrastructure Software GrowthVMWare is driving Infrastructure Software (ISG) revenues, which jumped 47% year over year to $6.7 billion and accounted for 45% of first-quarter fiscal 2025 revenues. Ongoing conversion from perpetual license for vSphere to subscription (60% completed at the end of fiscal first quarter) based clientele is driving growth. Broadcom’s strategy to offer a full stack VCF, which enables the entire data center to be virtualized, is expanding clientele, with 70% of the largest 10,000 customers adopting VCF at the end of the fiscal first quarter. In collaboration with NVIDIA, Broadcom has 39 enterprises for the VMware Private AI Foundation driven by AVGO’s open ecosystem, superior low balancing, and automation capabilities that allow customers to pull and run workloads across both GPU and CPU infrastructure.AVGO expects ISG revenues to increase 23% year over year to $6.5 billion in the second quarter of fiscal 2025.Strong Balance Sheet & Free Cash Flow Aids AVGO’s ProspectsBroadcom benefits from a strong balance sheet and its free cash-flow-generating ability. As of Feb. 2, 2025, cash and cash equivalents were $9.31 billion, and Broadcom generated $6.11 billion in cash flow from operations. Free cash flow was $6.01 billion and accounted for 40% of revenue at the end of first-quarter fiscal 2025.The strong balance sheet is helping AVGO to pay consistent dividends and return cash to shareholders through buybacks. In first-quarter fiscal 2025, Broadcom paid $2.8 billion in cash dividends.AVGO’s Earnings Estimate Revision Shows Upward TrendThe Zacks Consensus Estimate for fiscal 2025 earnings is pegged at $6.56 per share, up 4% over the past 30 days, indicating 34.7% year-over-year growth.The consensus estimate for fiscal second-quarter earnings is pegged at $1.56 per share, up 5.4% over the past 30 days, indicating 41.82% year-over-year growth.AVGO’s earnings beat the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 3.44%. Broadcom Inc. Price and Consensus Broadcom Inc. price-consensus-chart | Broadcom Inc. Quote Find the latest EPS estimates and surprises on Zacks Earnings Calendar.AVGO Shares Trading at a PremiumAVGO stock is not so cheap, as the Value Score of F suggests a stretched valuation at this moment.In terms of the forward 12-month Price/Sales, AVGO is trading at 13.73X, higher than its median of 13.39X and the sector’s 5.78X.Price/Sales Ratio (F12M) Image Source: Zacks Investment Research ConclusionBroadcom’s expanding AI portfolio, along with a rich partner base, reflects solid top-line growth potential. We believe these factors justify the premium valuation.Broadcom currently sports a Zacks Rank #1 (Strong Buy) and a Growth Score of B, a favorable combination that offers a strong investment opportunity, per the Zacks Proprietary methodology. 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