Title: Broadcom's AI Hype Train: Is the Valuation Justified, or Is AVGO Stock Overbought?
Broadcom (AVGO) has been riding high on the AI wave, and let's be honest, who isn't these days? The stock price has seen some serious jumps, fueled by projections of massive capital expenditure (CapEx) increases from the hyperscalers—Amazon, Google, Meta, Microsoft, and Apple. The question, as always, is whether the market's enthusiasm is justified by the underlying data, or if we're looking at another case of AI-fueled exuberance. I'm Julian Vance, and let's dig into the numbers.
The Hyperscaler Hype: A Closer Look
The core of the bull case for Broadcom rests on the anticipated surge in hyperscaler CapEx. CreditSights, a division of Fitch, projects a 36% increase to $602 billion by 2026. Sounds impressive, right? But let's break that down. They attribute 75% of that spending, or $450 billion, to AI-related infrastructure. Now, Evelyn Advisors projects a lower total CapEx figure of $365 billion for 2025, with the same 75% allocation to AI, translating to $274 billion. The difference between $274 billion and $450 billion represents a projected 64% growth rate in AI-specific CapEx.
But here's where I start to raise an eyebrow. These are estimates. Third-party estimates, not Broadcom's own projections. And while CreditSights is a reputable source, relying solely on their figures to justify a massive valuation jump feels a bit like building a skyscraper on a foundation of sand. Broadcom's current AI Serviceable Addressable Market (SAM) estimate sits between $60 billion and $90 billion. A 64% jump in hyperscaler AI spending doesn't automatically translate to a 64% increase in Broadcom's revenue. It depends on their market share, their ability to capture that increased spending, and, frankly, whether these hyperscalers actually spend as much as projected.
Broadcom's CEO, Hock Tan, has been hesitant to update the AI SAM estimate, stating he wants "better visibility," likely not until 2026. That reluctance, in my view, is telling. It suggests that even they aren't entirely convinced by these lofty projections just yet. The market, however, seems to have already priced in this optimistic scenario.
The Gemini 3 Effect: A Tangible Catalyst?
The recent surge in AVGO stock, specifically the 11% jump, was attributed to the release of Alphabet's Gemini 3 AI model. Gemini 3 Ignites the Market, Causing Broadcom’s Stock Price to Surge Over 11% The logic is that Gemini 3's advanced capabilities will drive increased demand for Broadcom's custom Tensor Processing Units (TPUs), which Alphabet uses for its own AI needs and provides to Google Cloud Platform customers. Salesforce CEO Marc Benioff even chimed in, praising Gemini 3's advantages over OpenAI's ChatGPT.
This is where we see a more direct correlation between a specific event and Broadcom's potential revenue stream. Broadcom's role as a supplier of custom TPUs to Alphabet is a concrete business relationship. And the numbers seem to bear this out: In the third quarter of fiscal year 2025, Broadcom’s AI revenue surged 63% year-over-year to $5.2 billion, with management anticipating a climb to $6.2 billion in Q4.
However, even here, caution is warranted. An increase in revenue doesn't automatically translate to an increase in profitability. The cost of producing these custom TPUs, the competitive landscape (Nvidia, AMD, and others are all vying for a piece of this pie), and the potential for pricing pressure from hyperscalers all need to be factored in. And this is the part of the report that I find genuinely puzzling. What percentage of that $5.2 billion AI revenue is profit? The reports don't say.
The VMware Wildcard: A Software Buffer?
Broadcom's acquisition of VMware is another factor influencing its valuation. The idea is that VMware's infrastructure-software revenue provides a more stable, recurring revenue stream, offsetting the cyclical nature of the semiconductor business. This is a sound strategy in theory, but the execution has been… messy.
Fidelity recently sued Broadcom, alleging that it is threatening to cut off access to legacy VMware software. European cloud providers have also appealed Broadcom’s VMware buyout, citing unfair licensing practices. These legal and commercial challenges introduce significant uncertainty. The potential for customer backlash, regulatory intervention, and even financial penalties could offset the benefits of the VMware acquisition. I've looked at hundreds of these filings, and this particular case is unusual; the anger is palpable.
The Technicals: A Squeeze or Sustained Momentum?
From a technical perspective, the 11% surge in AVGO stock cleared major resistance levels, suggesting a shift in market sentiment. However, momentum indicators aren't yet overheated, indicating there might be room for further gains. But technical analysis is, at best, an imperfect science. It's a lagging indicator, reflecting past performance, not a crystal ball predicting the future.
And here's where the community chimes in. I've been monitoring the chatter on various investment forums, and the sentiment is overwhelmingly bullish. But that, in itself, is a red flag. When everyone is convinced that a stock can only go up, it's usually a sign that a correction is imminent.
Is This a Bubble Waiting to Burst?
Broadcom's AI story is compelling, and its partnership with Alphabet is a tangible positive. But the current valuation, in my opinion, is stretched. It's pricing in a best-case scenario, relying heavily on third-party estimates and overlooking potential risks. The VMware acquisition, while strategically sound, introduces significant legal and commercial uncertainties. The market sentiment is overwhelmingly bullish, which, from my experience, is often a contrarian indicator. For AVGO's stock price to justify its current price, revenue growth and margins have to accelerate far beyond what is currently being reported.
