Broadcom‘s (AVGO 2.44%) stock price plunged 10% on Sept. 6 after the chipmaker and infrastructure software provider posted its latest earnings report. For the third quarter of fiscal 2024, which ended on Aug. 4, its revenue rose 47% year over year to $13.1 billion and exceeded analysts’ estimates by $110 million. Its adjusted earnings per share (EPS) increased 18% to $1.24 and also cleared the consensus forecast by $0.02.

Those headline numbers were impressive, but the tepid growth of its semiconductor business and softer-than-expected guidance drove away the bulls. So should investors consider its post-earnings pullback to be a buying opportunity? Let’s review the key numbers and discuss the three main reasons to either buy or sell Broadcom stock.

Image source: Getty Images.

The key numbers

Broadcom, which was known as Avago until it acquired the original Broadcom in 2016, previously generated most of its revenue by selling chips for the mobile device, data center, networking, wireless, storage, and industrial chip markets. But over the past eight years, the “new” Broadcom expanded into the infrastructure software market by acquiring CA Technologies in 2018, Symantec’s enterprise security division in 2019, and the cloud software giant VMware last November.

In the third quarter, Broadcom generated 56% of its revenue from its semiconductor solutions unit and the remaining 44% from its infrastructure software unit. Its infrastructure business grew rapidly over the past three quarters, but that growth was mainly driven by its acquisition of VMware. Its semiconductor business, which didn’t benefit from any big acquisitions, grew at a much slower rate.

Data source: Broadcom. YOY = Year over year.

The three reasons to buy Broadcom

The bulls think Broadcom is still a buy because its artificial intelligence (AI) chip sales are soaring, its non-AI chip businesses are stabilizing, and it actually raised its full-year outlook.

Broadcom’s sales of networking, optical, and custom accelerator chips are still surging as data centers upgrade their infrastructure to support data-hungry AI applications. It expects to generate $12 billion in AI chip revenue in fiscal 2024, up from about $4 billion in fiscal 2023. That would account for nearly a quarter of its full-year revenue.

Broadcom’s sales of non-AI chips slowed down over the past year as its other markets faced tough macro headwinds. But in its latest conference call, CEO Hock Tan said it “reached bottom in our non-AI markets” and was “expecting a recovery in Q4.”

As for its infrastructure software division, Broadcom said VMware’s bookings are still accelerating even as it transforms and streamlines the business to cut costs. It expects Vmware to exceed its original target of generating $8.5 billion in annual adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) about a year ahead of schedule.

Broadcom also raised its full-year revenue guidance from $51 billion to $51.5 billion (up 44% from fiscal 2023) and boosted its adjusted EBITDA margin outlook from 61% to 61.5%. That would be lower than its adjusted EBITDA margin of 64.8% in fiscal 2023, but that decline isn’t too surprising since it’s still integrating VMware’s lower-margin business.

The three reasons to sell Broadcom

The bears still don’t like Broadcom because its growth will decelerate after it fully laps its takeover of VMware, its debt levels are high, and its insiders are still net sellers.

For fiscal 2025, analysts expect Broadcom’s revenue to only rise 5%. It ended the third quarter with a debt-to-equity ratio of 1.6, and that leverage could keep climbing if it acquires more companies to expand its semiconductor and software businesses. It could also accidentally “diworsify” those businesses by biting off more than it can chew.

Broadcom’s stock still looks reasonably valued at 23 times forward earnings, but its insiders sold 44% more shares than they bought over the past 12 months. They also haven’t bought a single share over the past three months. The cooling insider sentiment suggests its upside potential could be limited as investors back away from hot AI stocks.

Which argument makes more sense?

Broadcom is a bold and ambitious company that isn’t afraid to take on a lot more debt to expand into high-growing markets. That aggressive strategy has paid off so far, and its successful evolution into a diversified chipmaking and software company makes it a good long-term play on the secular expansion of the cloud and AI markets.

Broadcom’s latest earnings report wasn’t flawless, but its strengths still clearly outweigh its weaknesses. Investors who buy the stock after its post-earnings dip and tune out the near-term noise could be well rewarded over the next few years.