Street Calls of the Week
Investing.com -- S&P Global Ratings has upgraded Broadcom Inc. to ’A-’ from a previous rating, citing stronger-than-anticipated artificial intelligence growth. The outlook is positive.
Broadcom has established itself as the second-largest AI semiconductor provider behind NVIDIA Corp. and leads the market in custom application-specific integrated circuit (ASIC) and networking solutions. AI semiconductor revenues now account for 57% of Broadcom’s total semiconductor sales in the third quarter of 2025 (ended August 3), up significantly from 41% in fiscal 2024 and 14% in fiscal 2023.
While S&P remains cautious about the long-term sustainability of the current AI investment cycle, the rating agency acknowledges its view has been too conservative over the past two years. Hyperscaler demand remains resilient and growing, with an industry downturn considered unlikely over the next one to two years.
Broadcom’s recent $10 billion AI order from a new customer (likely OpenAI) validates the company’s position as a trusted partner with broad IP portfolio and chip design capabilities. S&P believes AI-related revenues could grow in excess of 80% in fiscal 2026.
The rating agency identifies several manageable AI-related risks, including potential competition from NVIDIA, slowdown in AI investments due to macroeconomic factors, and customer concentration. However, S&P believes Broadcom’s non-AI semiconductor and software segments provide sufficient cushion against these risks.
Since S&P’s previous upgrade in January 2025, Broadcom has continued to outperform forecasts. Total revenues are expected to rise 23% in fiscal 2025, with AI-related semiconductor revenues growing more than 60% for the year. The Infrastructure Software segment should grow 25% in fiscal 2025, driven by strong adoption of VMware Cloud Foundation.
For fiscal 2026, S&P forecasts Broadcom’s total revenue will jump 32% to nearly $84 billion, with AI revenue growth exceeding 80%. The company’s adjusted EBITDA margin is expected to reach 66% with free operating cash flow approaching $40 billion.
S&P projects Broadcom’s adjusted leverage will improve to 1.2x in fiscal 2025 from 2x in fiscal 2024, and further decline to approximately 0.8x by fiscal 2026. This improvement comes despite dividends exceeding $12 billion per year and growing discretionary share repurchases.
The positive outlook reflects expectations that Broadcom’s operating performance will continue to improve over the next one to two years. S&P would consider an upgrade if Broadcom consistently outgrows the overall IT industry and maintains net leverage below 2.5x through acquisitions and shareholder returns.
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