Down 20%, Should You Buy Broadcom Stock on the Dip? The Answer Might Surprise You.
Down 20%, Should You Buy Broadcom Stock on the Dip? The Answer Might Surprise You.
Anthony Di Pizio, The Motley FoolSun, June 7, 2026 at 9:59 AM UTC
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Key Points -
Broadcom's artificial intelligence accelerators for the data center have become a popular alternative to Nvidia's industry-leading chips.
Broadcom's AI semiconductor revenue soared 143% during its recent quarter, but Wall Street was disappointed with management's forward guidance.
As a result, Broadcom stock closed 20% below its all-time high last Friday, but its valuation remains elevated, which could lead to more downside.
10 stocks we like better than Broadcom ›
The semiconductor sector suffered a brutal sell-off last week, and it started with Broadcom's (NASDAQ: AVGO) latest quarterly earnings report on Wednesday evening. Despite posting a strong result, the company's forward guidance fell short of Wall Street's expectations, which triggered a 20% decline in its stock.
Broadcom remains a high-quality business with a strong demand pipeline for its artificial intelligence (AI) accelerators, which are customizable data center chips that have become a popular alternative to the traditional graphics processing units (GPUs) supplied by competitors like Nvidia. Therefore, could the recent dip be a buying opportunity for investors? The answer might surprise you.
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The inside of a data center with dozens of server stacks.
Image source: Getty Images.
An impressive list of AI customers
Nvidia's GPUs are the best out-of-the-box data center chips for AI workloads, but hyperscalers like Alphabet and Meta Platforms are increasingly chasing more specialized solutions to fulfill their specific needs, so Broadcom is helping them design and fabricate custom AI accelerators.
Alphabet has a long-term partnership with Broadcom covering several generations of its AI data center chips, which it calls Tensor Processing Units (TPUs). Alphabet recently unveiled the TPU 8t for AI training, which offers 3 times the processing power of its previous generation (called Ironwood), and the 8i for AI inference, which delivers an 80% improvement in performance-per-dollar. Without Broadcom, companies like Alphabet would be trapped inside closed ecosystems with suppliers like Nvidia, with limited control over pricing and innovation.
Broadcom also supplies accelerators to leading AI start-ups Anthropic and OpenAI, which continue to diversify their hardware stacks to unlock as much computing capacity as possible. Anthropic is buying at least $21 billion worth of Alphabet's TPUs through Broadcom, which will be deployed gradually throughout 2026 and 2027.
But Broadcom is also one of the world's top suppliers of data center networking equipment. Its Tomahawk 6 Ethernet switch, which regulates how fast data travels between chips and devices, is the industry's only 100-terabit solution. However, the company is now launching a new version with double the capacity.
Broadcom's Q2 revenue growth accelerated, but guidance fell short
Broadcom generated $22.2 billion in total revenue during its fiscal 2026 second quarter (ended May 3), which was a 48% increase from the year-ago period. That growth rate marked a significant acceleration from the first-quarter result of 29% just three months earlier, and the momentum was mostly driven by AI-related sales.
The company's AI semiconductor revenue came in at $10.8 billion in the second quarter, representing a whopping 143% year-over-year increase. Management's guidance for the current third quarter (which will end in early August) suggests AI revenue could grow at an even faster pace of 200% to come in at $16 billion.
It's hard for investors to be disappointed with any of the above numbers, but Wall Street was hoping Broadcom would forecast around $16.36 billion in AI semiconductor revenue for the third quarter. Plus, CEO Hock Tan maintained the company's fiscal 2027 revenue guidance of $100 billion for this part of the business, whereas many analysts were expecting an increase.
The "disappointing" forecasts left Wall Street wondering whether peak AI hardware demand is now on the horizon. If it is, investment returns from the semiconductor sector will likely slow significantly going forward.
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Despite the sell-off, Broadcom stock isn't cheap
Although Broadcom stock closed 20% below its peak on Friday, June 5, it's still trading at a hefty price-to-sales (P/S) ratio of 24.9, which is more than double its 10-year average of 10.1. This suggests investors are pricing in a lot of future revenue growth, which explains why the stock is so sensitive to even the hint of slowing AI semiconductor sales.
AVGO PS Ratio Chart
AVGO PS Ratio data by YCharts. PS Ratio = price-to-sales ratio.
Moreover, based on Broadcom's generally accepted accounting principles (GAAP) trailing-12-month earnings of $6.00 per share, its stock is trading at a price-to-earnings (P/E) ratio of 64.1, making it almost twice as expensive as the Nasdaq-100 index, which has a P/E of 35.2. In other words, Broadcom also appears to be overvalued relative to a basket of its big-tech peers.
While there is a shortage of AI chips and components right now, there has been some unsettling news on the demand side recently, which is making investors nervous. Companies like Anthropic and Microsoft recently introduced passive price increases for the use of their AI models and software, focusing more on consumption-based billing -- and in Anthropic's case, it's calculating that consumption more aggressively.
These changes are necessary to cover the soaring costs of data center hardware and even electricity, but many enterprises are now rethinking their AI usage. Uber Technologies is one of Anthropic's customers, and its chief operating officer recently said it's getting harder to justify the ride-hailing giant's AI spending. Even Alphabet CEO Sundar Pichai said he's hearing complaints from many customers about rising AI costs.
If these rumblings turn into a measurable reduction in AI software spending, then demand for AI chips will almost certainly plummet. That doesn't bode well for Broadcom, so it probably isn't a good idea to immediately buy the recent dip in its stock, especially since its valuation remains so high.
Should you buy stock in Broadcom right now?
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Broadcom, Meta Platforms, Microsoft, Nvidia, and Uber Technologies. The Motley Fool has a disclosure policy.
Source: “AOL Money”
