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Broadcom (AVGO +2%) soared past top and bottom-line estimates in Q1 (Jan) while crushing its previous AI revenue forecast, fueling solid gains today. The semiconductor and services giant also issued upbeat Q2 (Apr) revenue guidance, forecasting approximately $14.90 bln, supported by an expected 44% spike in AI revenue to $4.4 bln. With shares tumbling by over 20% since surging to all-time highs last quarter, tacking on additional losses yesterday following deflating AI-related revenue guidance from peer Marvell (MRVL), today's report and guidance alleviated plenty of concern over a potential mid-year AI digestive phase talked about by analysts recently.

• As expected, AVGO delivered a healthy earnings beat in Q1, supported by better-than-expected gross margins of 79.1% and a decently-sized revenue beat. AVGO grew its top line by 24.7% yr/yr to $14.92 bln, above its $14.6 bln outlook. AI and services fueled AVGO's outperformance.
• AI revenue rocketed by 77% yr/yr to $4.1 bln, ahead of its $3.8 bln forecast, as the company's three hyperscale partners remained aggressive in their AI investments. AVGO is acting similarly, stepping up its R&D investments on two fronts: creating the next generation of custom AI accelerators, i.e., XPUs, and the next generation of Ethernet switches, i.e., Tomahawk 6. AVGO also reiterated its view that these hyperscalers would generate a serviceable addressable market (SAM) of $60-90 bln in FY27 (Oct).
  • Another exciting development in AI is that two additional hyperscalers selected AVGO to develop custom accelerators in Q1. Following last quarter's two new customers brings the total number of additional hyperscalers to four, which CEO Hock Tan noted should eventually generate a similarly-sized SAM. While Mr. Tan added that this journey could take at minimum 1.5 years, the demand for AVGO's XPUs showcases its technological advantage that can firmly cement a leadership position in AI over time.
• Services, which comprise a little under half of AVGO's total revenue, remained in high demand, registering a 47% jump in revs yr/yr, exaggerated slightly by deals slipping from Q4 into Q1. Still, AVGO is observing considerable growth in software, underpinned largely by its ability to enable entire data centers to be virtualized.
  • AVGO forecasted software revenue to continue recording double-digit growth in Q2, targeting a 23% increase yr/yr.
• Not every concern was alleviated by AVGO's Q1 report. The recovery in non-AI semiconductors remained sluggish as revs fell by 9% sequentially. Still, a silver lining is that it appears the worst is over. After bottoming last quarter, AVGO's broadband business posted a double-digit sequential recovery in Q1, with similar growth expected in Q2. Server storage was down by single digits sequentially in Q1 but is projected to be up high single digits in Q2. Meanwhile, wireless, albeit down sequentially, was flat yr/yr and is expected to remain flat yr/yr in Q2.
  • AVGO projects its non-AI revenue to be flattish sequentially in Q2 but is noticing that bookings continue to expand yr/yr.

While still not where it was to start March, AVGO's Q1 report is igniting a decent relief rally today. The demand for its XPUs highlights a competitive edge in an increasingly competitive AI atmosphere, boding well for AVGO over the long term. While economic uncertainty can create near-term volatility, we view current levels as attractive for buy-and-hold investors.