Broadcom Drops 10% in 3 Months: Buy, Sell or Hold the Stock?

BroadcomAVGO shares have dropped 9.7% over the past three months, underperforming the broader Zacks Computer and Technology sector's return of 0.9%. The company's shares have been suffering from margin pressure from the rising AI mix, supply constraints, a concentrated AI clientele, and weak non-AI business. AVGO shares have also underperformed NVIDIANVDA, Advanced Micro DevicesAMD and SkyworksSWKS over the same time frame. Shares of NVIDIA have jumped 10.4% while AMD and Skyworks have dropped 2.6% and 1.8%, respectively. So, what should investors do with the AVGO stock post the dip? Let us find out. AVGO Stock's Price Performance Image Source: Zacks Investment Research AVGO's Prospects Suffer From Multiple Challenges Broadcom's rapidly expanding custom accelerator (XPU) business carries lower gross margins because XPUs contain increasing amounts of expensive memory. In the third quarter of fiscal 2026, gross margin contracted 210 basis points (bps) sequentially to 75%, and Broadcom expects fourth-quarter fiscal 2026 gross margin of about 73%, compared with 78% a year earlier. Although operating leverage is offsetting much of this pressure, continued AI-driven mix deterioration is expected to remain an investor concern. Broadcom's ability to supply some products, including leading-edge wafers, substrates and high-bandwidth memory (HBM), has been lagging demand. Management has identified availability of land, power and completed data-center shells as potential bottlenecks. These constraints could affect the timing of AI deployments even when underlying customer demand remains strong. Broadcom plans to begin utilizing its Singapore substrate facility in fiscal 2027 to address part of the bottleneck. Customer concentration remains a headwind. The company currently has six major XPU customers, with future AI growth increasingly tied to deployments by Google, Anthropic, OpenAI and Meta. Moreover, weakness in non-AI business has been a headwind. Non-AI semiconductor revenues were only $4.2 billion in the third quarter of fiscal 2026, increasing 5% year over year but remaining flat sequentially, as weakness in wireless partly offset strength in broadband and server storage. Infrastructure software revenues are also expected to stabilize around $8.7 billion in the fourth quarter of fiscal 2026 after reaching $8.8 billion in the fiscal third quarter. Can AVGO's Strong AI Growth Boost Competitive Prowess? Broadcom's third-quarter fiscal 2026 results significantly strengthened its AI growth outlook. Revenues surged 86% year over year to $29.6 billion, while Semiconductor Solutions revenues surged 127% year over year to $20.8 billion. More importantly, AI semiconductor revenues soared 221% year over year and 54% sequentially to $16.7 billion in the third quarter. Broadcom expects the figure to accelerate to $21.7 billion in the fiscal fourth quarter, rising 236% year over year, driven by continued ramps of Google's Ironwood and TPU v8i, OpenAI's Jalapeno and Meta's MTIA accelerators. Visibility has also improved considerably beyond fiscal 2026. Broadcom expects fiscal 2026 AI revenues of about $58 billion, followed by approximately $115 billion in fiscal 2027 and $230 billion in fiscal 2028. The company said supply has already been secured to support the fiscal 2027 and 2028 outlooks, although actual demand exceeds the 2027 projection. Broadcom's networking portfolio is driving growth. Tomahawk 6 is being deployed broadly across AI hyperscalers, including customers using both Broadcom XPUs and competing GPUs, while Tomahawk Ultra adoption is beginning to ramp for scale-up Ethernet applications. The company has also taped out the 200-terabit Tomahawk 7 and is expanding EML, CW and VCSEL laser capacity as optical demand exceeds industry supply. AVGO's FY26 Earnings Estimate Revision Shows Steady Trend The Zacks Consensus Estimate for fiscal 2026 earnings is pegged at $11.74 per share, unchanged over the past 30 days, indicating 72.14% growth from the fiscal 2025 reported figure. The Zacks Consensus Estimate for fourth-quarter fiscal 2026 earnings is pegged at $3.66 per share, up 4.4% over the past 30 days, indicating 87.69% growth from the figure reported in the year-ago quarter. AVGO Stock: Buy, Sell or Hold? Broadcom shares are trading at a premium, as suggested by the Value Score of F. In terms of the forward 12-month price/sales (P/S), AVGO is trading at 10.34X, higher than the broader sector's 6.11X. Broadcom is also trading at a premium against peers, NVIDIA and Skyworks, shares of which are currently trading at 9.96X and 2.76X, respectively. AVGO Shares Are Overvalued Image Source: Zacks Investment Research Broadcom's expanding AI portfolio is expected to drive top-line growth. However, elevated AI expectations, a decline in gross margin expansion and customer concentration do not justify AVGO's current valuation. Broadcom currently has a Zacks Rank #3 (Hold), which implies that investors should wait for a more favorable point to start accumulating the stock. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here. Radical New Technology Could Hand Investors Huge Gains Quantum Computing is the next technological revolution, and it could be even more advanced than AI. While some believed the technology was years away, it is already present and moving fast. Large hyperscalers, such as Microsoft, Google, Amazon, Oracle, and even Meta and Tesla, are scrambling to integrate quantum computing into their infrastructure. 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