SAN JOSE — The rate shock that swept through semiconductor stocks Thursday came at a particularly inopportune moment for Broadcom. The company is seven months past a crucial earnings report that showed VMware integration synergies accelerating faster than its own guidance, and it had just begun to receive credit from analysts who spent most of 2024 skeptical that a $69 billion software acquisition made sense for a chip company.
Broadcom closed at $165.30, down 2.8%. The Philadelphia Semiconductor Index fell 2.7%; Broadcom’s slightly wider decline reflected its higher valuation multiple relative to the sector median, which makes the shares more sensitive to discount rate shifts.
Kevin Warsh’s remarks before the Chicago Council on Global Affairs — which pushed expectations for Federal Reserve rate cuts further into the future — hit Broadcom’s multiple in the way higher rates always hit companies with elevated forward multiples. Broadcom trades at approximately 27 times the next twelve months’ consensus earnings estimate, a premium that reflects the market’s confidence in the VMware free cash flow ramp and in the company’s AI custom silicon business.
https://www.youtube.com/watch?v=GcEMhiSHVpM
| Security | Close | Change | % Change |
|---|---|---|---|
| Broadcom (AVGO) | $165.30 | ▼ | -2.8% |
| SOX (Semiconductor Index) | — | ▼ | -2.7% |
| NASDAQ 100 (NDX) | 19,840 | ▼ | -2.3% |
| S&P 500 | 5,580 | ▼ | -1.9% |
The VMware story is the one most investors were focused on before Thursday morning. Broadcom’s infrastructure software division — which absorbed VMware and now operates under a subscription licensing model — has been generating cash at a pace that exceeded internal projections in the most recent quarters. VMware customers who resisted the transition to Broadcom’s bundled licensing terms have largely completed their negotiations. The holdouts that analysts predicted would churn have been smaller than feared. Renewal rates in enterprise accounts have come in above 90%, according to disclosures from Broadcom’s most recent investor calls.
That software revenue stream is what makes Broadcom structurally different from other semiconductor companies facing the same rate environment Thursday. Software cash flows at scale are more predictable than chip cycle revenue, and Broadcom’s blended business model now generates a meaningful portion of its operating income from software subscriptions that renew annually regardless of the broader semiconductor environment. The Warsh rate shock that hit Nvidia because investors recalculated the discount rate on AI GPU demand also hit Broadcom, but Broadcom’s software revenue is not growth-stage software — it is mature, contracted, and renewing.
The second Broadcom story is in custom AI accelerators. The company’s AI ASIC business — producing custom-designed compute chips for hyperscale customers who have chosen to design their own AI inference and training silicon rather than purchase Nvidia GPUs — has grown into one of the more significant revenue contributors in the semiconductor division. Meta Platforms is the most publicly discussed hyperscale customer for Broadcom’s custom AI chip work. The networking silicon that Broadcom supplies into large AI training clusters — the Ethernet switches and custom ASICs that connect thousands of AI accelerators — is another dimension of the same AI infrastructure buildout that drives Nvidia’s GPU revenue.
Broadcom is also a primary supplier of wireless connectivity components to Apple. The Wi-Fi, Bluetooth, and related baseband-adjacent chips that ship inside every iPhone represent a substantial and predictable revenue stream that is less sensitive to the AI infrastructure cycle and more sensitive to Apple’s product launch cadence. That Apple relationship provides a floor under Broadcom’s semiconductor revenue in cycles where hyperscale spending contracts.
None of that changes the math Warsh imposed on the stock Thursday. A company trading at 27 times forward earnings loses value when the discount rate rises, regardless of whether that value is correctly priced. The question for investors after Thursday’s session is not whether Broadcom’s underlying business changed — it did not — but whether the reset to a lower valuation creates an entry point that was not available before the Warsh intervention.
At $165.30, Broadcom’s market capitalization is approximately $770 billion. The company’s trailing twelve-month free cash flow run rate, incorporating the VMware contribution, is enough that investors with a multi-year horizon are paying a reasonable price for a business that combines chip-cycle exposure with defensive software cash flows. The S&P 500 also fell broadly on Thursday, underscoring how the Warsh rate shock extended well beyond the semiconductor sector. What Thursday’s session cannot answer is whether rates will stay elevated long enough to compress the multiple further before the next catalyst — likely Broadcom’s next earnings report — gives investors a reason to re-rate.
Related Posts
