Broadcom's AI Spending News Reinforces Growth Narrative But Doesn't Alleviate Valuation and Regulatory Concerns

What happened

Broadcom's stock rose on reports of increased AI capital spending by major tech firms like Google and Amazon, projected to reach hundreds of billions in 2026, highlighting its exposure to the AI infrastructure boom. The company is positioned to benefit with a disclosed $73B AI backlog in custom accelerators and Ethernet networking, as noted in DeepValue's analysis, which cites AI semiconductor revenue hitting $20B in FY25 and guided to $8.2B for Q1 FY26. However, the stock trades at ~$331, embedding high multiples (P/E ~68x, EV/EBITDA ~47x) that assume smooth conversion of the AI backlog within 18 months and sustained double-digit growth from VMware's high-margin software. DeepValue's report emphasizes significant risks, including potential European regulatory action on VMware pricing that could force concessions and erode software margins, alongside uncertainties in AI backlog timing and competitive threats from Nvidia and in-house silicon. Consequently, while the news underscores AI demand tailwinds, it doesn't change the underlying investment thesis that favors waiting for a pullback to ~$280 or clearer evidence of risk mitigation.

Implication

The increased AI spending by hyperscalers validates Broadcom's semiconductor growth trajectory, potentially supporting its $73B backlog and guiding toward higher revenue run-rates. However, the stock's current price already reflects optimistic assumptions about AI backlog conversion and VMware's ~93% gross margin software, leaving little buffer for execution missteps. European regulatory scrutiny of VMware pricing, with reports of 800-1500% increases and potential breaches, poses a tangible threat to software earnings that offset AI margin dilution. Investors should closely monitor quarterly results for AI revenue growth, backlog metrics, and any EU regulatory developments, as these will be critical for thesis validation. Given the crowded bullish sentiment and high multiples, maintaining a wait-for-better-entry stance around $280 or until AI growth and VMware stability are proven offers a more favorable risk-reward profile.

Thesis delta

The news reinforces the AI tailwind component of Broadcom's thesis, emphasizing hyperscaler spending that could drive backlog conversion and revenue growth. However, it does not address the critical VMware regulatory overhang or improve the valuation cushion, which are key downside risks in the bear scenario. Therefore, the overall investment thesis remains unchanged: wait for either a price pullback to the attractive entry of ~$280 or clearer evidence of AI revenue and backlog growing ≥20% with stable consolidated gross margin.