Broadcom Q2 26: Market frustration amidst absence of upward revision

Executive Summary

Broadcom delivered another record quarter, but the stock sold off ~-14% post-print (-22% from peak as per today’s price of USD 372) as investors had positioned for a guidance raise the company did not deliver. We believe the selloff may present an opportunity for investors.

We reiterate our Overweight rating on Broadcom (AVGO) and set a price target of USD 520, implying ~40% upside from the current USD 372.

Figure 1: Broadcom’s share price and our previous call

Read more: Broadcom 1Q26: Better earnings, flatter share price

Broadcom’s Q2 2026 result

Broadcom reported fiscal Q2 2026 (quarter ended early May) after the close on 3 June 2026, and the print was a clean beat on the numbers. Consolidated revenue of USD 22.2 bil (+48% y/y) was a record, driven by a 79% y/y surge in semiconductor revenue to USD 15.0 bil; non-GAAP gross margin of 77.1% and operating margin of 67.3% underpinned adjusted EBITDA of USD 15.2 bil (~69% margin). Non-GAAP diluted EPS came in at $2.44, and free cash flow set a record at USD 10.3 bil on capex of just USD 231 mil. Both revenue and EPS came in modestly ahead of consensus.

The composition of the beat matters more than the headline. AI silicon at USD 10.8 bil was ~72% of total semiconductor revenue and ~49% of total company revenue, the segment, which represented a much smaller share of revenue three years ago, now accounts for nearly half of total company revenue.

Two quality signals stand out. First, operating leverage: with gross margin at 77.1% and operating margin at 67.3%, incremental dollars are dropping through at very high rates even as the business scales, suggesting AI ASIC growth has not yet resulted in a meaningful deterioration in profitability.

Second, cash conversion. Free cash flow of USD 10.3 bil equates to a ~46% FCF margin on revenue, against capex of only ~1% of sales, among the strongest cash-generation profiles within the semiconductor industry. On the software side, the +9% headline understates momentum: annualized recurring revenue grew ~17%, indicating the VMware subscription conversion is still pulling reported revenue upward as legacy licences roll into ratable contracts.

Table 1: Broadcom’s Q2 2026 summary

Q2-FY2026 ($, % y/y)	Result	y/y
Total revenue	$22.2B	48%
Semiconductor solutions	$15.0B	79%
AI semiconductors	$10.8B	143%
Non-AI semiconductors	$4.2B	6%
Infrastructure software	$7.2B	9%
Non-GAAP gross margin	77.10%
Operating margin	67.30%
Adj. EBITDA	$15.2B
Non-GAAP diluted EPS	$2.44
Free cash flow	$10.3B

Source: Bloomberg Finance, iFAST Compilation, Data as of 3 June 2026.

Figure 2: Broadcom’s revenue vs FCF (USD bil)

Broadcom’s Q3 26 guidance

The key focus for investors was management's forward guidance.

For Q3 FY2026, management guided to consolidated revenue of ~USD 29.4 bil (+84% y/y), semiconductors ~USD 20.5 bil (AI ~USD 16.0 bil, non-AI ~USD 4.5 bil) and software ~USD 8.9 bil (+31%), with gross margin around 74% and operating margin near 67%. Crucially, on the longer horizon management reiterated its framing of “more than $100 billion” in FY2027 AI revenue rather than raising it. With the stock having run to an all-time high the session before, a market positioned for an explicit upgrade interpreted the in-line reiteration as a disappointment.

Figure 3: Broadcom’s business model

Source: Broadcom, iFAST Compilation, Data as of 11 June 2026.

On a sequential basis the guide is anything but soft. The ~USD 29.4 bil Q3 outlook implies ~+32% growth q/q, and the embedded ~USD 16.0 bil AI number implies ~+48% q/q off Q2's USD 10.8 bil, an acceleration, not a plateau. The guided gross-margin step-down to ~74% (from 77.1%) is the mechanical consequence of AI ASIC mix rising within the revenue base and is consistent with our structural thesis that blended margin drifts toward the low-70s as AI scales; which we believe is primarily a mix effect rather than evidence of pricing pressure. The FY2027 “>$100B” framing, set against management's FY2026 AI trajectory of ~USD 56B, implies AI revenue still roughly doubling next year, a number underpinned by multi-year customer commitments rather than spot demand.

The market reaction appears to have reflected expectations for a guidance upgrade rather than concerns about the underlying growth outlook.

Table 2: Broadcom’s Q3 26 guidance

Q3-FY2026 guidance	Value	Note
Total revenue	~$29.4B	+84% YoY
Semiconductor (AI / non-AI)	~$20.5B	AI ~$16.0B / non-AI ~$4.5B
Infrastructure software	~$8.9B	+31% YoY
Non-GAAP gross margin	~74%	Mix-driven step-down
Operating margin	~67%	—
FY2027 AI revenue (framing)	“>$100B”	Reiterated, not raised

Source: Bloomberg Finance, iFAST Compilation, Data as of 3 June 2026.

Pitfall share price post-earnings

AVGO had closed at an all-time high of $481.57 on 2 June, the session immediately before the release. On the results, the shares fell roughly -14% in the initial after-hours/next-day reaction and continued to drift lower over the following sessions, reaching $372 by 10 June, approximately 22% below the pre-earnings peak.

Figure 4: Share price reaction post-earnings

We read the share price weakness does not materially alter the company's longer-term earnings outlook..

The quarter validated the thesis on every operating line, AI acceleration, margin resilience, and record cash generation, and the “miss” was confined to the absence of a guidance raise the company was never obliged to give. Management has a consistent track record of setting a conservative AI bar and beating it, and the FY2027 revenue base is already substantially contracted across its hyperscale customers.

What has changed since last update

Our thesis is unchanged since our 1Q26 note, where Broadcom is one of the strongest players of merchant AI silicon, with a software annuity attached, but the AI trajectory we treated cautiously in March is now substantially contracted, and we have raised out-year estimates accordingly while deliberately trimming our fair multiple (28x to 26x) to discount concentration and cycle risk. On our revised numbers the stock trades at ~20x FY2028E non-GAAP EPS for business compounding earnings at a ~30%+ CAGR.

The most consequential change is to our AI revenue path, and therefore to out-year EPS. In March we treated management's “AI revenue to exceed $100 billion by 2027” framing cautiously, as an aspirational target rather than a modelled base and our estimates reflected a more measured ramp. Two quarters of execution have since substantiated it: management has put concrete shape on the FY2026 (~USD 56 bil) and FY2027 (>USD 100 bil) trajectory and, critically, disclosed a roster of six committed hyperscale XPU customers plus a >20GW “AI XPV” consortium commitment that provides greater visibility into future revenue generation.

We have raised FY2027E EPS by ~23% (to $17.59) and FY2028E EPS by ~19% (to $20.00). For context, applying even our prior 28x multiple to the upgraded FY2027E EPS would imply a target near $490, so the earnings revision alone, before any horizon roll, more than accounts for the higher target. Our price target rises from $400 to $520 (+30%).

Our BUY rating and the structural thesis are unchanged: Broadcom remains one of the highest-quality merchants in AI compute, with a high-margin VMware-anchored software annuity that the market under-credits. FY2026E EPS is essentially held ($10.95 to  $11.49), reflecting that the near-term was already well-captured in March; the revision is concentrated in the out-years where the contracted pipeline now gives us more visibility. The “better earnings, muted/negative share-price” pattern also rhymes across both quarters, in 1Q26 a strong print met a flat tape; in 2Q26 a stronger print met a ~14% selloff, reinforcing our view that the stock is being driven by positioning and expectations rather than fundamentals.

Table 3: Difference between our previous update vs now

Metric	1Q26 note (Mar-26)	This note (Jun-26)
Rating	Overweight	Overweight
Price target	$400	$520
Fair P/E (base)	28x	26x
FY2026E non-GAAP EPS	$10.95	$11.49
FY2027E non-GAAP EPS	$14.25	$17.59
FY2028E non-GAAP EPS	$16.75	$20.00

Source: iFAST Compilation, Data as of 10 June 2026.

Investment Thesis

The market read an in-line FY2027 guide as a disappointment, we read it as a de-risked floor on revenue already largely under contract. Four supports underpin the call. (1) AI silicon scaling ~6x in three years, from USD 20 bil in FY2025 to a guided ~USD 56 bil/USD 103 bil in FY2026–27E before we deliberately flatten the ramp to ~USD 120bil/USD 145 bil in FY2028–29E, with networking (Tomahawk/Jericho/optical) adding higher-margin attached content; (2) a ~USD 32bil to USD 42 bil software annuity at ~75%+ gross margin that compounds quietly (Q2 ARR +17% vs revenue +9%) and insulates earnings from the chip cycle; (3) a fabless free-cash-flow machine converting ~half of revenue to cash (~USD 57 bil to USD 115 bil), flipping ~USD 49 bil of net debt to >USD 120 bil net cash by FY2028E and funding dividends, ~USD 10 bil+ buybacks and untapped M&A optionality.

We build revenue forecast using a bottom-up, anchored to guidance where it exists and to our own assumptions beyond it. AI semiconductors: we adopt management's FY2026 (~USD 56 bil, +178%) and FY2027 (~USD 103 bil, +84%) guidance, then deliberately decelerate to ~USD 120 bil (FY2028E, +17%), reflecting a more conservative growth assumption beyond management's guidance period. Non-AI semiconductors: a measured cyclical recovery off the FY2025 trough, ~USD 17.6 bil in FY2026E, consistent with the Q2 (+6%) and Q3-guide (+12%) cadence. Total revenue therefore rises from USD 63.9 bil (FY2025A) to ~USD 105 bil (FY2026E, +65%) and ~USD 178 bil (FY2028E). Growth is expected to be front-loaded (+65% then +49%) before normalising as the AI revenue base expands..

Figure 5: Our revenue forecast

BUY Broadcom, TP at $520 with 40% upside potential

Our primary methodology values the equity on FY2028E non-GAAP EPS multiplied by fair price/earnings multiple. We assign a base fair P/E of 26x, close to the SMH semiconductor-index multiple.

As such, we reiterate a BUY for Broadcom, and we computed a target price of USD 520 in FY28, a 40% upside potential from today’s price of USD 372.

Table 6: Broadcom’s valuation

	FY2026E	FY2027E	FY2028E
EPS	11.49	17.59	20
y/y growth (%)		53%	14%
Implied PE (x)	32.38	21.15	18.60
Current Price	372
Fair PE			26
Upside Potential			40%
Target Price			520

Source: Bloomberg Finance, iFAST Compilation, Data as of 10 June 2026.

Table 7: Our projection

(USD mil)	FY23A	FY24A	FY25A	FY26E	FY27E	FY28E
Revenue	35,819	51,574	63,887	105,356	157,460	178,798
Gross profit	26,757	39,454	50,245	79,544	115,733	129,629
EBIT	22,125	30,731	41,997	70,594	105,533	118,179
Adj. EBITDA	25,874	34,568	50,633	79,094	113,283	125,279
GAAP net income	14,082	5,895	23,126	42,667	72,016	82,890
Non-GAAP EPS ($)	4.08	5.04	6.77	11.49	17.59	20
Free cash flow	17,633	19,414	26,914	56,936	85,110	98,479
Capex	452	548	623	1,200	1,600	2,000
Net debt/(cash)	25,036	58,205	48,958	10,815	-51,670	-123,377
Diluted shares (M)	4,350	4,877	4,943	4,940	4,925	4,905

Source: Bloomberg Finance, iFAST Compilation, Data as of 10 June 2026.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.