Another Broadcom earnings report, another breathtaking stock reaction in response. Shares of the AI chipmaker are soaring almost 11% Friday, sending the stock to a fresh all-time high and putting its market capitalization north of $1.5 trillion. The monster move evokes what we saw from Broadcom back in December, when shares flew 24% in a single session on strong earnings and extra sweet conference call commentary from CEO Hock Tan. A similar situation is playing out again Friday. Yes, Broadcom’s fiscal 2025 third quarter results were strong, but adding fuel to the advance is an equally strong guide for the ongoing quarter and Tan’s remarkably upbeat updates on the call. Taken together, it’s clear that despite all the hoopla about an artificial intelligence spending bubble, we’ve not yet seen the peak in AI demand when it comes to the real-deal players in the space. Broadcom’s conference call is really the main fuel for Friday’s rally. Indeed, when the results first dropped after the closing bell, the stock saw a modest move higher. Shortly after the call got going at 5 p.m. ET, the bullish fireworks would begin. The first of them was Tan announcing that Broadcom had secured a fourth customer for its custom AI chips, which it calls XPUs. Its three existing customers are widely believed to be Alphabet , Club name Meta Platforms and TikTok parent ByteDance. This new one is thought to be ChatGPT creator OpenAI. Here’s what Tan said: “As we had previously mentioned, we have been working with other prospects on their own AI accelerators. Last quarter, one of these prospects release production orders to Broadcom. And we have accordingly characterized them as a qualified customer for XPUs. And, in fact, has secured over $10 billion of orders of AI racks based on our XPUs. And reflecting this, we now expect the outlook for fiscal 2026 AI revenue to improve significantly from what we had indicated last quarter.” That was the primary comment driving Friday’s move. Why? Because it was a surprise to the market, and a surprise means it wasn’t factored into analysts’ financial projections. Put another way, it means that the 2026 earnings estimate the market has been working off to determine a fair value for Broadcom’s stock has been too low. And if the EPS estimate has been too low, the price-to-earnings multiple that everyone is using to value the stock has been lower than we all thought. A stock rally based on information like that is one that has legs because it means investors can pay a higher price for the shares — without paying up in terms of valuation. Consider this: Going into Thursday night’s print, the FactSet consensus earnings estimate for Broadcom’s fiscal year 2026 stood at $8.22 per share. At Thursday’s closing price of roughly $306 a share, the stock was trading at 37.2 times that 2026 estimate. As of Friday morning, the FactSet estimate has moved up to $8.92 per share, an 8.5% increase to FY26 estimates. What this means is that even with the stock’s roughly 11% surge, it’s barely gotten any more expensive on a price-to-earnings basis. Using its $335 intraday price, the stock is only trading at 37.5 times that new FY2026 estimate. That’s practically an immaterial difference versus Thursday’s close, especially considering investors are usually willing to assign a higher multiple to companies with accelerating growth rates. We saw this same dynamic playout with fellow Club name and AI chipmaker Nvidia back in 2023. The stock surged higher, but never really got more expensive because Wall Street’s earnings estimates were moving just as fast. What’s more, the new FY26 earnings estimate for Broadcom is likely still too low — purely based on the mechanics of how financial data systems work. It simply takes time for analysts’ updated estimates to make their way into the database and show up for us to see. For example, at the time of this writing, our screen showed that Melius Research, a firm that has been rightfully bullish on the stock, has a FY2026 earnings estimate of $8.48 per share. However, we know from Melius Research’s note to clients Friday that they are now modeling EPS of $9.71 for next fiscal year. The point is that as these new estimates work into the data providers’ systems, we’re likely to see the Wall Street consensus move even higher in the weeks to come and the stock, in turn, will appear cheaper. In fact, when we calculate the P/E ratio using only estimates added to the FactSet system post-earnings, it already does look cheaper. AVGO 1Y mountain Broadcom’s stock performance over the past 12 months. Now consider that Tan is telling investors that demand is not only sustaining but is picking up steam. Knowing that, it’s easy to conclude that analysts will need to continue updating their financial models with more optimistic forecasts as they rethink the demand profile with a fourth major customer now in the picture. For those somewhat skeptical about the upward revisions and Broadcom’s ability to meet the new targets, we get it. After all, Wall Street has a tendency to overshoot both on the upside and the downside. In this case, our counterargument would be what Tan said about Broadcom’s backlog: It’s now over $110 billion. That figure “implies significant business visibility over the next two years,” Goldman Sachs analysts wrote in a note to clients. Perhaps unsurprisingly, Goldman was among the firms raising their estimates materially for FY26 and the following fiscal year. It went to $9.95 (from $8.81) and $12.10 (from $10.54), respectively. The other conference call firework aiding Friday’s advance and giving the Street conviction to raise numbers is Tan agreeing to stick around through at least 2030. Tan is the man with the plan. He has transformed Broadcom through mergers-and-acquisitions into the well-oiled technology giant it is today, and that cannot happen without a plan that looks years into the future. Tan has been CEO of the company since March 2006. At the time, it was known as Avago Technologies. A decade into his tenure, it acquired Broadcom Corporation and rebranded to take on the acquired firm’s name (though it kept the same stock ticker, hence why it trades AVGO). He’s continued to make a series of smart acquisitions, including the blockbuster VMWare deal that has added to the attractiveness of Broadcom’s stock. The analysts over at Bernstein summed it up well in their earnings reaction note. “The Broadcom narrative is going to take off once again, and at this point we suppose a bear would have to hope that the company is getting out over their skis,” they wrote. “But we note that Broadcom knows this business better than anyone, and Hock must see a runway here as he renewed his contract through 2030, suggesting he sees something worth sticking around for. We suspect that numbers are going to go up materially with potential room for further upside to come; valuation (which has admittedly looked rich) is clearly becoming justified.” Bottom line As impressive as today’s stock move is, the stock is actually cheaper than it was Thursday from a P/E perspective. While the valuation is based on forward-looking estimates that technically could prove too rosy, the reasons we laid out above give us conviction to trust them. They are: The major new customer for its custom AI chip design services Its robust backlog Tan’s contract extension As we saw with Nvidia, stock rallies rooted in earnings revisions that are at least equal to the move in stock price are not only justifiable, but tend to have additional room to run longer-term. Of course, there are plenty of investors sitting on significant paper profits in the stock, so we could see some folks ring the register in the near future. In fact, as discussed on Friday’s Morning Meeting, we’re likely to do the same thing when our trading restrictions aren’t in place. This is not counter to our conviction, though. It’s simply our discipline to generally book a profit on quick, large gains, and to trim positions that start to exceed our self-imposed 5% threshold, which this move is causing our Broadcom stake to do. That also gives us the flexibility to potentially step in if the stock ever gets caught up in a unwarranted sell-off. Indeed, the earnings-revision dynamic does mean that if the stock does encounter a meaningful pullback, you’ll not only be getting a good price, but a good value as well. (Jim Cramer’s Charitable Trust is long AVGO See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
