What’s Behind The Surge In Broadcom’s Stock?

Broadcom Inc. (NASDAQ: AVGO) has significantly outperformed the broader market this year, with a roughly 46% year-to-date rise compared to the S&P 500’s 14%. This strong performance has been driven by solid quarterly results and the acquisition of a new custom AI-chip customer.

Despite this recent surge, the stock has delivered substantial long-term growth, soaring over 500% since early 2023. This impressive long-term rally is primarily the result of two key factors:

1. The company’s price-to-earnings (P/E) ratio saw a significant 276% increase, climbing from 14 in 2022 to the current 54.
2. Adjusted net income grew substantially by 91.5%, rising from $16 billion to $31 billion.
3. These positive drivers were partially offset by a 15% increase in the total number of outstanding shares, which now stands at 4.9 billion.

We will delve deeper into the specifics of these factors and the company’s valuation in the sections below. That being said, if you seek an upside with less volatility than holding an individual stock, consider the High Quality Portfolio. It has comfortably outperformed its benchmark—a combination of the S&P 500, Russell, and S&P MidCap indexes—and has achieved returns exceeding 91% since its inception. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio perfmance metrics.

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1. Why the P/E Ratio Surged

The market repriced Broadcom from a mature semiconductor company to an AI infrastructure growth story. The company secured major deals including a $10 billion agreement with OpenAI, positioning it as a critical supplier of custom AI accelerators to hyperscalers. AI revenue has grown for eleven consecutive quarters, with Q3 2025 AI revenue surging 63% year-over-year to $5.2 billion. This transformation from a legacy chip maker to an essential AI infrastructure provider justified a substantial valuation premium, driving the P/E from 14 to 54. Our dashboard on Broadcom’s Valuation Ratios offers more details on Broadcom’s other valuation multiples.

2. What’s Behind Higher Profitability

Two major drivers powered the near-doubling of adjusted net income:

• The VMware acquisition: Broadcom closed its $69 billion acquisition of VMware in November 2023, immediately adding a high-margin software business to its portfolio. The company maintains strong margins with 39% operating margin and 32% net margin. On an adjusted basis, the company’s LTM net margins are much higher at 51%.
• AI semiconductor boom: The explosion in demand for custom AI chips generated massive incremental revenue at favorable margins. Analysts estimate custom silicon could generate $25-30 billion in revenue next year and exceed $40 billion by around 2027, dramatically expanding the earnings base.

3. Why Share Count Increased

The 15% increase in outstanding shares stems directly from the VMware acquisition financing. Broadcom offered VMware stockholders merger consideration in the form of cash and stock, issuing new shares as partial payment for the $69 billion transaction. This dilution was the price of rapidly scaling the business through acquisition rather than organic growth alone.

The Bottom Line

Currently trading around $340 per share following recent market volatility, Broadcom’s valuation reflects both the opportunities and risks inherent in its business model. The stock’s price-to-earnings (P/E) ratio of approximately 54x based on trailing adjusted earnings represents a premium to traditional semiconductor companies and is significantly higher than the stock’s own 30x average over the last three years.

However, this valuation premium appears justified given the company’s strong AI exposure and software transformation. With an average analyst price target of $370, AVGO stock still appears to have room for growth.

That said, our assessment could be wrong, and investors may not be willing to pay such a high multiple for AVGO, given its inherent risks. Key risks include customer concentration, cyclical semiconductor demand, and competitive pressures in the AI chip market. Investors should weigh all these risks carefully before buying AVGO stock. Also, see how AVGO stock’s valuation compares to that of its peers.

See, investing in a single stock without comprehensive analysis can be risky. Consider the Trefis Reinforced Value (RV) Portfolio, which has outperformed its all-cap stocks benchmark (combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to produce strong returns for investors. Why is that? The quarterly rebalanced mix of large-, mid-, and small-cap RV Portfolio stocks provided a responsive way to make the most of upbeat market conditions while limiting losses when markets head south, as detailed in RV Portfolio performance metrics.

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