Episode 95 | Broadcom’s Role in the Future of AI

In Episode 95 of Market News with Rodney Lake, Professor Lake, director of the GW Investment Institute, analyzes Broadcom, highlighting the company’s central role in the semiconductor boom and its strong positioning across AI infrastructure. The episode examines Broadcom’s rapid revenue growth, expanding gross and net margins, rising free cash flow generation, and asset-light fabless business model, which relies on manufacturing partners such as Taiwan Semiconductor Manufacturing Company. Professor Lake also discusses the leadership of CEO Hock Tan, the successful integration of acquisitions like VMware, and the company’s competitive advantages across multiple semiconductor verticals, while weighing concerns around elevated valuation, leverage, and geopolitical risks tied to semiconductor production in Taiwan. Overall, the episode presents Broadcom as one of the leading companies benefiting from the ongoing AI infrastructure buildout, though investors must balance its strong fundamentals against high market expectations.

Transcript

Thank you for joining Market News with Rodney Lake. This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started. Welcome back to Market News with Rodney Lake. I'm your host, Rodney Lake. This is a podcast coming to you from the George Washington University, the GW Investment Institute.

We're right here in Duquès Hall and the Duquès family studio and the heart of Foggy Bottom right here on campus. Coming to you. All right. So welcome back to the people who've been here before. And welcome to anybody new. Thanks for watching on YouTube. Listening on Spotify, Apple, Amazon. We love it. Thanks. Send us your comments. Let us know.

New episodes please. And thank you. Also remember this is for entertainment and educational purposes only. Sometimes we own these companies. I'll try to mention when we don't always own these companies, in some cases for larger positions, but that's not the point. This is not an investment advice disclaimer up front here. All right. Into the company today that we're going to go over.

So we're going to go over a single company on market news. We're not going to do broad market news for this episode. We're going to do a single company. That single company today is Broadcom. We own this in small portions in a couple of our portfolios here. So it's not it's not not a big holding in one of our portfolios rather.

So it's not a big holding. So but it's an important company and something that we're watching. And everybody I think has, you know, has been watching the semiconductor business lately. And obviously there if you're maybe it's not obvious, but Broadcom is really a semiconductor company across a couple of different categories. So we'll talk a little bit about Broadcom.

But let's get a sense for Broadcom. The ticker is AVGO so let's dive in. We're here in you know heading towards the end of May here May 19th when we're recording this 2026. So you know this information is going to be from around then. But let's dive into the company. So what's going on with Broadcom? This is a fabulous semiconductor company that competes across a different variety of different areas.

And so but let's get some stats together first. So the semiconductor business obviously with the push from AI has been a very hot sector to be in. Broadcom, no exception. And so let's look at the market cap. So this this company is not a small company. This is 1.95 trillion market cap as of 5/19/2026. So this is quite a large company and it's grown fairly dramatically.

And so and it's a combination of things. And we'll talk about that. And then today when we do single companies we go over the GW Investment Institute framework business, management, price valuation, and balance sheets. We're going to go over that and we're going to score each give a composite score. But we're going to run through this whole thing obviously in a 20 approximately 20 minute episode.

None of these are real deep dives. So we're scratching the surface sometimes. Sometimes, obviously when we have follow up episodes, we go deeper. But for today, it's the first time we're really covering Broadcom. So let's talk about it. And let's get the high level things out of the way. As we mentioned market cap as the start 1.95 trillion.

So this is a very large company and it is a US based company. So let's jump into now what the sales are. So again remember what is this company do. It is in the semiconductor business. It is a fabulous business. And so that tends to be a very good business. And its customers are the people that that you would expect, Nvidias and people that are there.

Excuse me, peers like in Nvidia, and Marvell, AMD those are some of their peers. So it creates ASIC chips, customized chips. And you might have heard, for example, Meta and others that are trying to do, and OpenAI who want to create their own custom chips are using AVGO Broadcom technology and them as a service. Now to make the distinction up front here, what does fabless mean?

This means they do not fabricate their chips. The principal outsourcer there that they use is TSMC for manufacturing, which we've talked about before, but global foundries as well as others. But TSMC is the most. Now if you wanted to talk about within their business model, what is a potential vulnerability? Well, people talk about, okay, if there's vulnerability within the setup for any of the companies that are fabulous and they rely on Taiwan Semiconductor, especially, all the high end stuff is done in Taiwan right now.

So if that be ever becomes a geopolitical flashpoint. The Trump administration was just recently in China. Hopefully, you know, cooler heads are prevailing at the moment. But as a risk, it's something that to consider, something to think about. That's in the business model. But for CapEx, that's much better. That's much more asset light to be fabless. All right.

So now let's dive a little further into the business on the revenue side. What are we talking about here. So revenue. And so their fiscal year is 11 and well really ends 10/29. Or you know, it could be 11/02 in the case of 2025 here. But in the case, it's end of the month for, excuse me, October. And so if you look back, what was the 11/2/2025 number?

That was 63 billion. And then through the last 12 months here through the end beginning of February rather is 68 billion. So the numbers here are good. So 25% increase from the latest number. And then so but let's go year over year just to give a sense of where they're going. So the 2024 number, 51 billion. The 23 number, 35.

And then 33 for the 22. So going back across make it a little bit easier to look at the numbers side by side from the 22 it's 33 and then 35. That's a you know modest increase right about 8%. And then a big jump. So in 24 you're talking 51 billion. And then the 63 23% and then 68 25%. Now the projected here significant growth.

So the 10/31/2026 number fiscal year 103, that is a 62% year over year increase. And then the 27 number is the 55 is 55% at 161 billion. So and we'll get to to the price earnings forward multiple here which is important because you see all this projected earnings growth forward multiple is going to look okay. Not super expensive because you can see 62% followed by 55% on already large numbers.

And so going from 68 to 103. Again we want to look at the past obviously. Where has the company come from to maybe better understand the company. But as an analyst, investor, business person, we really care about what's happening today. And what do we think is really going to happen in the future? That's what we really care about.

Where is the company if we're buying it now? If we hold it now, if we're selling it now, whatever we're doing with the company, we really need to be focused on what do we think is happening and where is that going to position the company to be. And one year, three years, in five years, the way that the market is moving now, very challenging to think about where's five years from now, but certainly one and three years out.

Where are we? They are squarely in this AI infrastructure build out on the semiconductor side. So it's really important to to think and consider that. And so you can see these large numbers now as we do when we go over the businesses and we talk about okay, what are the gross and net margins. Let's check those out next.

So gross margins here, 67% projected 2026 to go to 75% and 73% in 27, you know is that a one off? No. You go back to 2022 66 and 2023 68, then 63 and then 67. So these are very good gross margins. And actually they're accelerating. So they're actually projected to go up to 75% for the full year 2026.

That's the 10/31 for them. And the 10/31/2027, 73, almost 74%. So these are fantastic elite gross margins. Let's take a look at the net margins, the current net margins for the trailing 12 months, 40% last year for the fiscal year, which is 11/2/2025, 40% now that is a, has gone up and down. So in the past the semiconductor business bit more cyclical.

Plus they they acquired VMware which has very high margins. And so things have changed. But if you look at 2022 still good net margins 34%, 40% in 2023, 24% back down and then up to 40% at 2025, 40% now projected to go again what we care about the most, what's happening through the rest of this year, 53% through 10/31/2026 and 54 through the full year.

10/31/2027. So where's the company going? Increase in gross margins, increase in net margins. Now, that is highly dependent on what happens from now until then and what's happening with the AI infrastructure buildout if they continue to participate, which they are currently are right now, and they're part of the center of this there, I would say right down the middle of the fairway, if you'd like to call it a golf analogy, here they are in the midst of all of this, and they cut across a couple of different areas that people care about custom Asics chips, you know, GPUs, they are they are really at the heart of this.

And so, you know, their clients are, you know, asking more and more for their services. All right. So next up so that's the business. So the and then let's just add one more thing on the business here. So because that's important for the balance sheet as well. These are all interrelated as you know if you talk about that the free cash flow here you know this does not require a ton of CapEx.

And so if you look at the CapEx budget here. $773 million, sub a billion here. So not these are not huge numbers. And over the past years, 2022 you're talking the 400s, in 23 450, 550 in 24, 620 in 25 projected to get to just under 1 billion in 2026 and 1.2, almost 1.3, in 2027. So compared to Amazon's, as we've talked about in the past, 200 billion to build out for the AI world, they are CapEx light.

Now part of that as we talked about because they are fabless. They do not have their own fabrication facilities. They don't manufacture. That is Taiwan Semiconductor. Those heavy CapEx burdens shifted to Taiwan Semiconductors. So where does that then show up on the gross, on the net margins. And so they are designing these custom chips for their clients. And so obviously you can see on this CapEx light model that the big, you know, CapEx numbers like we've mentioned for what Google is doing, or Alphabet and Amazon, for example, is doing Microsoft is doing, Tesla is doing.

This is a very different setup there. They need to plow money in for those big CapEx budgets. And a CapEx like company like Broadcom is not and does not need to do that unless they change their business model. So that does start off a decent amount of free cash flow. So you're talking trailing 12 months 28 billion 2060 or before that in the full year 2025.

Now where are we going? Next year, they're saying free cash flow of 51 billion. And that's sorry this year full year 2026 10/31. And then next year, 10/31/2027 is 84 billion. So these are these are quite big numbers. And so very good. All right. So on the business side what are we going to score? So obviously these are good numbers.

These are good ranges. There is some vulnerabilities we have to believe in the build out obviously. So where do we put that? Well all in all let's call it an 8.8 or an 88. So let's let's call it an 8.8 for now. All right. So 8.8 if you want to root the nine but we'll do it. We're going to go 8.8 at the moment.

So let's move on to management. So who's the manager of this company. Hock Tan. Tan has been the manager of this company for a long time through a couple of different mergers and acquisitions. So he's been there. You know, somebody who's a seminal figure in the semiconductor business and has done such a great job, has really shepherded this company through, again, several different acquisitions and has done a great job of that.

So he was before that, then Broadcom and then Broadcom now through these series of acquisitions and combinations. And so really a stellar figure here has done a fantastic job. Has increased shareholder value has done the buybacks has integrated VMware which has very high net margins on the software side virtualization. And so has done a fantastic job. So it's really hard to say anything negative about what they're doing.

Now. You could say that they have a little too much leverage, which we'll get to on the balance sheet. But the capital allocation here, when we talk about what's the job of management, they have they have done a fantastic job, for example, the VMware. And they've been very creative. All the things that they've done now they had that M&A has, you know, been fantastic.

Now the balance sheet not quite as good. But overall I think management is doing a fantastic job. And Hock Tan has been executing. Flawless is always difficult to say. There's obviously some things you could say we could like to do this better or what has done worse than we expected, but has done a really fantastic job. And so overall through the acquisitions, including VMware probably being the most notable that people would keep track of as an example and has done very well and has been a very accretive to their margins.

That's a high gross and net margin business. So fantastic job there. We're also going to give an 8.8 on the management. Great job. Hock tan tip of the cap to him has done a very fantastic job. All right so I'm not going to spend a ton of time today on management. Probably worth revisiting at some point. But we'll we'll get there.

So let's now get into the valuation. So this is where people are definitely going to say, you know no bueno. This is not this is not a great you know multiple here. It's too high and it's too reliant on the AI build out. So what's the Ford multiple 36 times. So again this is May 19th 2026. Expectations are high.

We went over the numbers for the the earnings forecasts and the revenue and earnings forecast for 26 and 27 and lots of free cash flow. So doing very well you know. But that that's challenging sometimes to think about. But they have to execute on that. And can you get comfortable? Well the 36 is not sort of a ridiculous multiple.

Certainly not by any measure. But it's certainly higher than Qualcomm for example, and right now higher than Nvidia for sure. And so when you think about these numbers, these are the trailing numbers which I'll mention here just for reference. But we really care about the forward numbers the trailing 72 times. So you can see the expected growth there between those two.

But you look at 36 times. That's certainly not cheap. You're paying up and you're certainly paying for what you think is going to happen in the future here. And again, this is heavily reliant on this AI build out. So what are we going to give this. Well let's give this a 4.8. So this is really a five. So pretty low.

And so maybe we could upgrade it a little bit. But let's leave it at the 4.5 for now. And you know come back to it maybe at a later time. But certainly there's lots of expectation built into this valuation. All right let's move on to the balance sheet. Now you talk about the balance sheet. Not a bad balance sheet.

So when you think about okay we mentioned this is almost a $2 trillion market cap, $1.9 trillion market cap at the moment. Cash and cash equivalents 14. You know, get 60 14 billion, 66 billion. So you know this. You're not super comfortable here with the debt. So you'd like to you'd like to have net cash for a company that has such high net margin, such high gross margins generates a lot of free cash flow.

You know, expected again for the trailing 12 months at 28 to 51. So you're not really worried about the, you know, the net debt position, let's say 50 billion. But still, you know, it doesn't help you sleep well at night. You're certainly not sleeping like a baby at night with this balance sheet. Altman Z-score here 13 again, not not too bad.

But let's look at the interest coverage ratio for this eight times. Not great. You know we'd like ten plus. Now why would we worry a little bit less on the balance sheet. Well it's because you know high free cash flow generation low CapEx burden. And so not not super concerning. But you know, you're not going to give it as high as the scores in 8.8.

Certainly not a 9 or 10 here. It could be better. But given where they are, given how the business is set up and given where the business could go, you know it's hard to ding them too much given again, the low cap, the low cap intensity, excuse me for the business and the high gross net margins and free cash flow interest coverage again, eight times could be a little bit better, but we'll leave it there.

All right. So what are we going to give it on the balance sheet. And then we'll come back and we'll pull all this together and talk about the company overall. 8.2 times. So we'll pull it all together here and review a little bit. So when we talk about again the business this is at the heart of the semiconductor AI build out.

They are best in class here. And they cut across you know custom Asics chips networking. And so they compete really with a lot of different companies on those different verticals. Now there's probably not a single company that competes with them directly in all of those verticals. And so in this way they are unique. But that could be perceived as potential advantage or potential disadvantage that some of these companies like on the networking side, Arista Networks, we've talked about before, it does a better job specifically on that.

Nvidia does this specifically a better job on the GPUs and the accelerators, and Intel does the specifically better job on the CPUs. So you could argue that this lack of specialization across these different verticals is a weakness. But you could also argue that and I think both arguments have some validity. You could also argue that given the breadth of their operations, they're well positioned for the AI build out, and they're really going to be able to capture a lot of the value that gets put into and created from the AI world, because they have this diverse set of products that cuts across the things that you need to get AI to be more efficient, to

be more valuable, to generate more value. And so they're the best positioned company or one of the best positioned companies for that. So that's an argument that you can make as well. Right now, the markets obviously buying more of that argument than the the prior argument that I made that they're obviously going to garner a lot of this value.

And hence, again, on the business side, we gave them an 8.8. And so that is a very good score. Now when we talk about management, Hock tan I think is one of the best in the business. We gave them an 8.8 their VMware acquisition. They executed super well. Again high gross high net margins fantastic. Lots of free cash flow generation.

Definitely a dominant player in the business. The price valuation we gave them a 4.8. Not great. Obviously the forward PE here is very high 36 times and there's a lot of expectations built into that. When we talked about the numbers and the growth that you would need to expect to get there, you're talking 60% for the full year, this year of growth on the revenue and 55% for 27.

So a lot of expectations built into the side. Again, not ridiculous at 36 times, but certainly lots of growth built into those numbers to keep to put that number down 4.8. On the balance sheet, net debt. Don't love it. However again CapEx like business a billion this full year billion two for next year 50 billion let's say in net debt not great from our standpoint.

Interest coverage remember earnings before interest and tax over interest expense eight times right now like that to be a little bit higher. So we're going to give them 8.2 there. You pull that together. That's a 7.6, 7.7. Maybe you want to round it up to an eight. Very good. You know from average to very good depending on the component comes out to let's say average to slightly above average.

Overall there's a lot going on here. We could spend through 2 or 3 episodes. Excuse me to talk about Broadcom. We'll revisit another time. There's a lot happening in the AI world. The AI build out there definitely the center of this. And they're worth watching. So as a business person analyst investor I think it's important to understand at least what they do.

If you're not going to own them, understanding how they fit in to the other parts of the business. So I think this will help scratch the surface for this. For Broadcom again, we own it in one of our portfolios in a small indirect amount. So it's not not a big setup here. We appreciate everybody watching. Again not investment advice entertainment purposes and educational purposes only.

We hope everybody has a great rest of your week. Depending on when you're listening or watching this again, send us some comments. Let us know what else we can cover. That's it for this episode of Market News with Rodney Lake. Thank you.