Following Nvidia's record-breaking quarter that reignited market enthusiasm, the spotlight has shifted to Broadcom Inc (NASDAQ: AVGO).

The world's third-largest chipmaker delivered its own stunning results on September 2, posting revenue of $29.59 billion — an 86% year-over-year surge — with adjusted earnings of $3.32 per share, both crushing Wall Street expectations. Even more impressive, its free cash flow margin hit an all-time high of 46%, with free cash flow growth outpacing revenue growth by 9 percentage points. Yet despite this textbook-perfect performance, Broadcom's stock has tumbled 23% from its June peak, leaving year-to-date gains at just 6% while the Philadelphia Semiconductor Index jumped 61% over the same period. With Nvidia having proven that the AI narrative is far from over, Broadcom is emerging as the most attractively valued gem in the AI hardware space — trading at just 18.5 times fiscal 2027 earnings, compared to a forward multiple of 33 times for custom chip rival Marvell Technology (NASDAQ: MRVL).

Q3 Results Crush Expectations: Record Revenue of $29.59 Billion, Semiconductor Segment Up 127% Year-Over-Year

Broadcom's fiscal 2026 third-quarter results comprehensively beat market forecasts across the board: Revenue reached $29.59 billion, up 86% year-over-year and surpassing expectations by $156.5 million; adjusted earnings per share hit $3.32, beating estimates by $0.08; semiconductor solutions revenue surged to a record $20.8 billion, up 127% year-over-year; and infrastructure software revenue climbed to $8.8 billion, a 29% increase.

The semiconductor solutions segment serves as Broadcom's primary growth engine, accounting for 70% of total revenue. This business encompasses custom AI accelerators, Ethernet switching chips, broadband access equipment, and wireless components. Among these, custom AI accelerators (ASICs) are expanding at a remarkable pace — Broadcom's clientele includes Google (TPU), Meta (MTIA), and most recently Anthropic. During the earnings call, CEO Hock Tan revealed that Anthropic is projected to become Broadcom's largest AI accelerator customer by 2027. Anthropic is aggressively expanding its AI computing capacity, having signed agreements with multiple hardware suppliers to meet its AI service demands. This signal further confirms Broadcom's indispensable position in the custom AI chip arena.

Broadcom's fourth-quarter guidance was equally robust, projecting revenue of $34.8 billion — a 93% year-over-year increase and a 7 percentage point acceleration from the previous quarter. At a 46% free cash flow margin, Q4 free cash flow is on track to surpass $16 billion.

Profitability: Record 46% Free Cash Flow Margin Makes This a Cash-Printing Machine in a Capital-Intensive Sector

While most "neocloud" enterprises in the AI hardware space continue to struggle with losses, Broadcom demonstrates rare profitability: free cash flow reached $13.7 billion for the quarter with a 46% margin, expanding 2 percentage points year-over-year; gross margins remain consistently elevated at approximately 75%; and annualized free cash flow run rate stands at no less than $55 billion.

Beyond the sheer scale of Broadcom's free cash flow, the quality of its growth is equally critical — free cash flow growth outpacing revenue growth by 9 percentage points indicates that its expansion is becoming increasingly profitable. This suggests that as the custom AI chip business scales further, Broadcom's margins may still have upside room.

Broadcom and Nvidia are 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, having achieved substantial leaps in core financial metrics including revenue, gross profit, and net income over the past year.

Valuation Deeply Discounted: 18.5x Forward P/E Versus Competitor's 33x

Broadcom's stock currently trades at approximately $357.90, with a forward P/E ratio of about 18.5 times based on fiscal 2027 earnings projections. This valuation represents a significant discount within the AI hardware sector. The 49 analysts tracked by S&P Global have assigned Broadcom a consensus "Strong Buy" rating with an average price target of $533.41 — implying roughly 49% upside from current levels. Jefferies maintains a "Buy" rating with a $550 price target, while Huatai Securities has set a target of $550.22.

Analysts believe that given Broadcom's free cash flow growth potential in the custom AI chip segment, a reasonable valuation would be 25 times forward earnings. Based on the consensus fiscal 2027 EPS estimate of $19.37, a 25x multiple corresponds to a target price of approximately $484. Should Q4 guidance continue to exceed expectations and drive earnings revisions upward, this target could see further upside.

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

Broadcom's growth narrative rests on three core pillars. First, Anthropic becoming the largest customer by 2027. As a frontier AI laboratory, Anthropic is expanding its computing infrastructure at an unprecedented pace, having signed agreements with multiple hardware vendors. Tan confirmed on the earnings call that Anthropic is expected to surpass all existing customers by 2027 to become the largest revenue source for Broadcom's AI accelerator business.

Second, Google's TPU remains irreplaceable. Although Google has added Marvell to its custom chip supply chain, sparking concerns about Broadcom losing share, JPMorgan analysts argue these worries are "overblown." 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 is intended to support its internal teams and TPU ecosystem expansion, not to replace Broadcom.

Third, the custom chip market continues to expand. With the explosion in AI inference demand, the ASIC market is growing at a pace far exceeding that of the GPU market. As the undisputed leader in this space, Broadcom is well-positioned to benefit from this structural trend through its deep engagement with core customers including Google, Meta, and Anthropic.

Core Risks: Hyperscaler Concentration and Free Cash Flow Margin Watch

Broadcom's primary risk stems from rising customer concentration. Should hyperscalers become more cautious in their chip procurement agreements, Broadcom could face significant growth deceleration. As the custom AI chip business accounts for an increasingly larger share of total revenue, Broadcom's dependence on this segment is concurrently rising.

Another metric warranting close attention is the free cash flow margin. If Broadcom's free cash flow margin were to fall below 40%, or gross margin decline under 70%, it would trigger fundamental questions about the valuation thesis. Additionally, Broadcom is in talks with lenders to raise over $60 billion in debt for an AI chip financing deal that would benefit Anthropic. This news has raised concerns about Broadcom's "circular financing" model — similar controversy has previously pressured Nvidia's valuation. Broadcom must strike a balance between pursuing scale expansion and maintaining financial health.

Conclusion

Broadcom's latest earnings report tells the story of an "underappreciated AI infrastructure king." Record revenue of $29.59 billion, 127% semiconductor segment growth, and a 46% free cash flow margin — these numbers alone sufficiently demonstrate Broadcom's dominance in the custom AI chip market. Yet the stock's 23% decline from June highs, the mere 18.5x fiscal 2027 forward P/E, and rival Marvell's substantial 33x valuation premium collectively form a rare "value gap" signal.

In a market where Nvidia trades at 14.9 times forward earnings and Marvell at 33 times, Broadcom — as the AI custom chip leader with the strongest free cash flow generation capability — clearly has a valuation that fails to fully reflect its growth potential. As one analyst observed, Broadcom and Nvidia benefit from the same AI data center growth trends, with both achieving substantial jumps in key metrics including revenue, gross margin, and net income. Now that Nvidia's record results have proven the AI narrative is far from concluding, Broadcom — an AI infrastructure giant boasting 75% gross margins, 46% free cash flow margins, and the dual backing of Anthropic and Google — is emerging as the most attractively valued opportunity in the AI hardware arena.