Stellar Performance but Lower Valuation than Peers: Is Broadcom (AVGO.US), the "King of AI Custom Chips," Becoming an Undervalued Gem?

After Nvidia ignited the market with a record-breaking quarterly report, the spotlight has shifted to Broadcom (AVGO.US). The world’s third largest chipmaker delivered an equally stunning result on September 2—a revenue of $29.59 billion, up 86% YoY, and an adjusted EPS of $3.32, both smashing Wall Street expectations. Even more eye-catching, its free cash flow margin reached a record high of 46%, with free cash flow growing nine percentage points faster than overall revenue.

Yet, despite this “textbook-level” performance, Broadcom’s share price has plummeted 23% from its June high, rising only about 6% year to date, while the Philadelphia Semiconductor Index surged 61% over the same period. With Nvidia proving that the AI narrative is far from over, Broadcom is emerging as the most attractively valued “undervalued gem” in the AI hardware sector—trading at just 18.5x FY2027 earnings, compared to 33x forward P/E for Marvell Technology (MRVL.US), its main custom chip rival.

Q3 Earnings Crush Expectations: $29.59B Revenue Record, Semiconductor Business Soars 127% YoY

Broadcom’s Q3 FY2026 results beat market expectations across the board:

Revenue: $29.59 billion, up 86% YoY, $1.565 billion above expectations;

Adjusted EPS: $3.32, $0.08 above expectations;

Semiconductor Solutions: Revenue of $20.8 billion, up 127% YoY, hitting a new record high;

Infrastructure Software: Revenue of $8.8 billion, up 29% YoY.

The Semiconductor Solutions segment is Broadcom’s core growth engine, accounting for 70% of consolidated revenue. This division includes custom AI accelerators, Ethernet switch chips, broadband access devices, and wireless components, among other products. Notably, custom AI accelerators (aka ASICs) are growing at an astonishing pace—Broadcom’s customers include Google (TPU), Meta (MTIA), and recently, Anthropic.

On the earnings call, Broadcom CEO Hock Tan revealed that Anthropic is expected to become Broadcom’s largest AI accelerator customer by 2027. Anthropic is actively ramping up AI compute and has signed agreements with multiple hardware providers to fulfill its AI service needs. This further cements Broadcom’s irreplaceable position in custom AI chips.

Broadcom’s Q4 guidance is also robust—revenue is expected to reach $34.8 billion, up 93% YoY and accelerating 7 percentage points sequentially. With a 46% free cash flow margin, Q4 free cash flow is set to exceed $16 billion.

Profitability: 46% Free Cash Flow Margin Record—A Money Printer in a “Burn Rate” Industry

Within the AI hardware space, most “neocloud” companies are still struggling with losses, while Broadcom demonstrates rare profitability:

Free cash flow: $13.7 billion (quarterly), free cash flow margin 46%, up 2 percentage points YoY;

Gross margin: Consistently at an extremely high ~75% level;

Annualized free cash flow run rate: At least $55 billion;

Broadcom’s free cash flow is not only staggering in scale—the quality of its growth is crucial: free cash flow is growing 9 percentage points faster than revenue, a sign that Broadcom’s scale expansion is becoming increasingly profitable. This implies further upside for Broadcom’s margins as the custom AI chip business expands.

Broadcom and Nvidia are currently the only two companies in the AI hardware sector with free cash flow margins exceeding 40%. Both benefit from the same data center growth trends and have seen significant growth in revenue, gross profit and net income over the past year.

Valuation Seriously Underestimated: 18.5x Forward PE vs. Competitor’s 33x

Broadcom is currently priced around $357.90 per share, with a forward P/E of about 18.5x based on FY2027 earnings forecasts—a significant undervaluation within the AI hardware sector. According to S&P Global, 49 analysts rate Broadcom a “Strong Buy” with an average target price of $533.41, implying nearly 49% upside from current levels. Jefferies maintains a “Buy” rating with a $550 target, and Huatai Securities gives a $550.22 target price.

Analysts believe that considering Broadcom’s free cash flow growth potential in custom AI chips, a reasonable valuation would be a 25x forward P/E. With consensus FY2027 EPS of $19.37, a 25x P/E implies a target price around $484. Any upward revision to earnings from Q4 outperformance would provide additional upside to this target.

Key Catalysts: Anthropic Orders, Google TPU Moat, and Share Expansion

Broadcom’s growth narrative rests on three core pillars:

First, Anthropic will become the largest customer in 2027. As a leading AI lab, Anthropic is scaling its compute infrastructure at an unprecedented pace and has signed agreements with multiple hardware partners. Hock Tan confirmed on the earnings call that Anthropic is expected to surpass all existing clients by 2027, becoming Broadcom’s top AI accelerator revenue generator.

Second, the irreplaceability of Google TPU. Although Google has added Marvell to its custom chip supply chain, leading to concerns over Broadcom’s market share, JP Morgan analysts believe such concerns are overstated. Given the five-year agreement signed in April 2026, Broadcom’s position as Google’s primary TPU partner will not be displaced. Google’s addition of more partners aims to support its internal teams and expand the TPU ecosystem, not to replace Broadcom.

Third, ongoing expansion of the custom chip market. As demand for AI inference explodes, the custom chip (ASIC) market is outpacing the GPU market’s growth. As the outright leader, Broadcom—deeply integrated with Google, Meta, and Anthropic—will continue benefiting from this secular trend.

Key Risks: Large-Scale Customer Concentration and Free Cash Flow Margins

Broadcom faces a key risk from increasing customer concentration. If hyperscale customers become more cautious in chip procurement agreements, Broadcom may face significant growth slowdowns. As the proportion of the custom AI chip business increases, Broadcom’s dependency on this segment rises accordingly.

Another metric to monitor is free cash flow margin. If Broadcom’s free cash flow margin falls below 40%, or gross margin drops below 70%, it would trigger a fundamental re-evaluation of its valuation logic.

In addition, Broadcom is in talks with lenders to raise over $60 billion in debt for an AI chip financing deal benefiting Anthropic. This news has raised concerns in the market about Broadcom’s “circular financing” model—a similar controversy that has previously pressured Nvidia’s valuation. Broadcom will need to strike a balance between scale expansion and maintaining financial health.

Conclusion

This Broadcom earnings report tells a story of the “undervalued king of AI infrastructure.” The record $29.59 billion revenue, 127% semiconductor business growth, and 46% free cash flow margin—all demonstrate Broadcom’s dominance in the custom AI chip market.

However, a 23% drop from June’s highs, a mere 18.5x FY2027 forward P/E, and a rival like Marvell trading at a 33x premium together present a rare “value opportunity.” In a market where Nvidia trades at a 14.9x forward P/E and Marvell at 33x, Broadcom—the AI custom chip leader with the strongest free cash flow generation—clearly has a valuation that underestimates its growth potential.

As one analyst put it, Broadcom, like Nvidia, benefits from the same AI data center growth trends, and both have seen significant jumps in key metrics such as revenue, gross profit, and net income. As Nvidia, with its record-breaking results, proves the AI narrative is alive and well, Broadcom—the AI infrastructure giant with a 75% gross margin, 46% free cash flow margin, and both Anthropic and Google as key clients—stands out as the most attractive “undervalued gem” in AI hardware.