Broadcom (NASDAQ: AVGO) has emerged as an important AI processor company, albeit in a niche space. The company sells a variety of processors, but its application-specific integrated circuits (ASICs) are especially in demand right now because they can be designed for companies running specific AI models.
The need for these processors is so high that Broadcom CEO Hock Tan recently said the company's 2027 AI revenue forecast of $115 billion will likely be higher, as "demand actually exceeds this outlook." That's great news for Broadcom shareholders.
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Here's what Tan said about future AI chip demand and what it means for Broadcom stock.
Broadcom had a blockbuster third quarter (which ended Aug. 2), with sales jumping 86% to $29.6 billion and non-GAAP (generally accepted accounting principles) earnings per share rising 96% to $3.32.
Fueling that growth were the company's AI processors, and Broadcom's management was quick to point out just how much demand is increasing and will continue to do so over the next couple of years. Tan said on the third-quarter earnings call:
In 2027, we have secured the supply to again double AI revenue to approximately $115 billion. Our demand actually exceeds this outlook, and we will work to improve supply. In 2028, we expect the trajectory of growth to continue.
Rarely does a CEO issue guidance for sales to double in a year and, in the same breath, state that sales will likely be even higher than the current outlook. But that wasn't even the most impressive statement coming from Tan. In the next sentence, he said that Broadcom's AI processor revenue will double again in fiscal 2028 -- reaching an astonishing $230 billion.
Tan noted that he provided AI revenue guidance through 2028 to illustrate Broadcom's growth trajectory. This type of outlook is great for investors because it helps to paint the picture of just how big the current AI processor growth cycle is for the company. Instead of wondering whether the AI processor supercycle is slowing for the company, shareholders now know that "demand continues to be extremely strong."
The vast majority of Broadcom's AI processor revenue comes from its ASICs. These processors are coveted by large tech companies right now because they can be designed to run a company's specific AI model, thereby increasing their efficiency.
For example, Broadcom has a multi-year contract to design Alphabet's AI processors, called Tensor Processing Units (TPUs), that will help run and train Google Gemini. Anthropic and OpenAI also have orders to buy custom-designed processors for their frontier AI models. OpenAI and Broadcom debuted Jalapeño, OpenAI's first custom AI chip, just a few months ago.
The result is not just the expected doubling of Broadcom's revenue but also massive earnings gains. Tan said on the call that the company is "very much on target" to exceed $30 in earnings per share in fiscal 2028. That's more than six times the company's earnings in fiscal 2025.
All of this means that Broadcom is highly profitable thanks to the booming AI business. And analysts have taken notice. Analysts' average price target for Broadcom stock is $533 -- representing a 46% increase from its current price -- with more than 40 of them assigning a buy rating to the stock.
But you don't have to take analysts' opinions to conclude that Broadcom stock would be great for your portfolio. With AI sales and earnings surging and companies leaning into custom AI processors for their models, Broadcom shares will likely continue their upward trajectory as the company taps into further AI processor demand.
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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Broadcom. The Motley Fool has a disclosure policy.
Broadcom CEO Hock Tan Says Demand Already Exceeds Broadcom's $115 Billion AI Forecast. Here's What That Means for the Stock. was originally published by The Motley Fool