Broadcom's AI Revenue Just Soared 221%, and Profits Tripled. So, Why Is the Stock Flat?

Key Points

• Broadcom reported third-quarter results that sailed past Wall Street's expectations.
• The accelerating results and robust guidance left no doubt that artificial intelligence (AI) has room to run.
• Investors gave a collective shrug thanks to a premium valuation and forecast "miss."
• 10 stocks we like better than Broadcom ›

There's little question that Broadcom's (NASDAQ:AVGO) position in the artificial intelligence (AI) revolution has made it a bellwether for the industry. As a result, Wall Street and Main Street alike were on pins and needles on Wednesday afternoon, seeking insight into the state of AI.

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Expectations were high ahead of the company's quarterly financial report. Broadcom's results provided a deeper understanding of the trajectory of AI adoption, offering the clearest evidence yet that AI uptake continues at a rapid pace. And despite impressive results, investors reacted with a collective shrug.

Image source: The Motley Fool.

AI momentum is accelerating

Broadcom delivered the results of its fiscal 2026 third quarter (ended Aug. 2), and records continued to fall. Record revenue of $29.6 billion climbed 86% year over year -- accelerating from 48% growth in Q2, fueling adjusted earnings per share (EPS) of $3.32, which jumped 96%. The company’s profitability in accordance with generally accepted accounting principles (GAAP) was even more impressive, as diluted EPS of $2.68 soared 215%.

For context, analysts' consensus estimates called for revenue of $29.4 billion and adjusted EPS of $3.24, so Broadcom cleared expectations with room to spare.

Strong demand for AI solutions fueled Broadcom's record results, as AI semiconductor revenue soared 221% year over year to $16.7 billion. This marked the 14th consecutive quarter of AI-centric growth. Cash generation was also robust, as operating cash flow of $14.2 billion drove free cash flow of $13.7 billion, up 98% and 95%, respectively.

CEO Hock Tan made no bones about what was driving the company's growth, saying, "Demand for our custom AI accelerators and networking continues to be very strong." CFO Amie Thuener noted, "Broadcom achieved record revenue, operating profit, and free cash flow in Q3.”

The company's fourth-quarter forecast was eye-opening, guiding for revenue of $34.8 billion, accelerating to 93% year-over-year growth, with its operating profit margin flat at 66%. For context, analysts' consensus estimates were calling for Q4 revenue of $35 billion.

Broadcom has a track record of issuing conservative guidance, and that practice likely continued in the current quarter. Tan said he expects the existing momentum to continue, guiding for AI semiconductor revenue to soar 236% to $21.7 billion.

The company's capital return program also shone. Broadcom announced a quarterly dividend of $0.65 per share, payable on Sept. 30 to shareholders of record on Sept. 21. While its dividend yield of 0.7% might seem meager, that's because of the stock's blistering rise of 322% over the past three years.

So why is the stock flat?

Despite delivering high double-digit revenue growth and a triple-digit profit increase, it simply wasn't enough. That comes down to several factors. For one, there's the slight discrepancy between Wall Street's expectations and Broadcom's fourth-quarter forecast, which was enough to rattle fair-weather investors and initiate a wave of profit-taking.

Moreover, the stock's "premium" valuation is also likely a factor. At 61 times earnings and 32 times forward earnings, Broadcom might seem pricey, unless you venture beyond the most commonly used valuation metrics. Using the more appropriate price/earnings-to-growth (PEG) ratio -- which takes the company's accelerating growth into account -- returns a multiple of 0.49, when any number less than 1 is indicative of an undervalued stock.

Despite the lack of investor enthusiasm for Broadcom's results, I would argue the numbers speak for themselves. In my view, the stock is an unequivocal buy.

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Danny Vena, CPA has positions in Broadcom. The Motley Fool has positions in and recommends Broadcom. The Motley Fool has a disclosure policy.