Brasada Capital: Broadcom ($AVGO) Investment Case
Brasada Capital: Broadcom Inc. (AVGO) Investment Case
Introduction
In their Q4 2025 letter, Brasada Capital introduces Broadcom as an addition to their Equity Income strategy in April, highlighting it as their best year-to-date performer and positioning it as a critical AI infrastructure play. Brasada Capital, known for focusing on businesses with fortress balance sheets, pricing power, and repeatable free cash flow, presents Broadcom as uniquely positioned in the AI battle against NVIDIA. The letter emphasizes the importance of identifying companies with durable competitive advantages and diversified profit pools during a potentially speculative AI capex cycle. Brasada’s decision to invest in Broadcom came after a significant pullback on tariff fears, reflecting their approach of buying quality businesses at attractive entry points when market sentiment is overdone.
Investment Highlight: Broadcom Inc. (AVGO)
Business Overview
- Mega-cap semiconductor conglomerate selling design and critical components for leading-edge chips
- Data-center infrastructure software provider
- Led by CEO Hock Tan, described as “arguably one of the greatest CEOs of all-time”
- Portfolio includes custom AI chips (ASICs), networking solutions, data-center software, and iPhone connectivity chips
Market Position
- Positioned as #2—if not #1—winner in AI over the next decade
- Real fight in AI characterized as between NVIDIA and Broadcom
- Dominates custom AI chips (ASICs) market with Google as anchor customer
- Near-monopoly position in iPhone connectivity (cellular/Bluetooth/Wi-Fi/GPS)
- Leader in Ethernet networking technology across data centers
Performance Analysis
- Custom AI Chip Leadership:
- Designs application-specific computing chips for Google’s many applications (Search, YouTube, Cloud)
- Custom-AI revenue rose 225% in 2024 to $8.6 billion
- Expected to grow ~170%+ in current year to $24 billion
- Multi-billion-dollar deals signed with Meta and OpenAI for custom chip development
- Differentiated approach versus NVIDIA’s general-purpose “glove-fits-all” compute stacks
- Networking Dominance:
- Leads with Ethernet—the standard technology across non-AI clouds and enterprise data centers
- Critical for allowing chips to communicate and work in conjunction
- Hypergrowth category adjacent to AI compute
- Pressuring proprietary approaches, prompting NVIDIA to announce its own Ethernet solution
- Continued share gains and innovation in networking segment
- High-Margin Software Buffer:
- VMware data-center software described as “800-lb gorilla” in server virtualization
- 92% gross margin providing sticky, non-cyclical revenue stream
- Helps manage computing costs including AI workloads
- Expected to grow teens percentage this year as customers shift from licenses to subscriptions
- Then at least mid-single digit growth thereafter
- iPhone Connectivity Monopoly:
- Near-monopoly in iPhone connectivity chips (cellular/Bluetooth/Wi-Fi/GPS)
- Provides stable, recurring revenue stream from Apple relationship
- Non-AI business contributing to diversified revenue base
Growth Runway
- 2026 expected to be another step-up year in AI and networking
- Subscriptions fueling steady free cash flow generation
- Upcoming recovery across Broadcom’s non-AI businesses
- Hyperscaler interest expanding beyond Google as custom chip capabilities proven
- Continued innovation and market share gains in networking
Market Dynamics and Opportunities
- Sits in duopoly with NVIDIA across the AI stack
- Owns Ethernet scale-out solutions critical for AI infrastructure
- Custom AI chips addressing needs of biggest buyers (hyperscalers)
- Google’s rapid AI-chip progress driving increased demand for Broadcom chips
- Growing interest from other hyperscalers for custom solutions
- Shift from general-purpose to application-specific computing accelerating
Valuation and Entry Point
- Purchased after >30% pullback in share price on tariff fears
- Market implied 30% EPS cut over 2-3 years, viewed as severely oversold
- Lower China-tariff exposure than market feared
- Attractive risk/reward given diversified business model and growth trajectory
Capital Allocation and Management
- CEO Hock Tan excels at game-changing M&A
- Consistently executed for shareholders over past 2 decades
- One of the most successful stocks over past two decades
- Track record of value-creating acquisitions and integration
Risks
- Tariff exposure and geopolitical tensions affecting semiconductor supply chains
- Heavy customer concentration with Google as anchor custom AI chip client
- Intense competition with NVIDIA across AI compute and networking
- Cyclicality in semiconductor business despite software buffer
- VMware integration and subscription transition execution risks
- Dependency on continued hyperscaler AI spending and capex cycle
- Potential for AI bubble burst impacting demand
- Rapid technological change requiring continuous innovation
Other Key Points
- Competes directly with NVIDIA in AI and networking chips
- High-margin software (92% gross margin) buffers semiconductor cyclicality
- Diversified business model across custom chips, networking, software, and connectivity
- Positioned to benefit regardless of whether general-purpose or custom chips win AI race
- Strong free cash flow generation from subscription software business
- Benefits from both AI buildout phase and ongoing infrastructure needs
Brasada Capital views Broadcom as a strategic duopoly player in AI infrastructure alongside NVIDIA, citing its dominance in custom AI chips with hyperscaler customers, leadership in Ethernet networking, high-margin VMware software providing cash flow stability, and iPhone connectivity monopoly as key factors. They believe Broadcom’s diversified profit pools, proven management execution, and position across multiple critical AI infrastructure layers offer compelling long-term value, especially after the tariff-driven selloff created an attractive entry point for a company positioned to be a top winner in the AI infrastructure buildout over the next decade.
