AVGO: Broadcom $110 Billion Backlog Can't Hide Margin Pressures

Sep 23 - Broadcom Inc. AVGO is flexing its growth muscle, but investors are still weighing the risks that come with it. The company recently delivered $16 billion in Q3 2025 revenue, a 22% jump year over year, thanks to AI semiconductors and VMware software. With a $110 billion backlog in hand, CEO Hock Tan has no shortage of demand to point to.

The real pivot, though, is VMware's shift from one-off licenses to the subscription-based vSphere Cloud Foundation (VCF). For Broadcom, it means recurring revenue and steadier cash flow. For clients, especially mid-tier firms, it could mean higher costs. While 90% of Broadcom's top customers already signed on, the jury's still out on whether smaller buyers will stick with the pricier model.

Balance sheet risk is harder to gloss over. Broadcom sits on nearly $69 billion in debt against just $9.35 billion in cash, much of it tied to the VMware deal. Goodwill now makes up roughly half its assets, raising flags about the quality of its financial foundation. Free cash flow margins at 38% help cushion the load, but debt dependency remains heavy.

Margins also look less bulletproof. Gross margins hover at 70%, but operating and net margins slipped as semiconductors took a bigger slice of revenue. FY24 net income dropped 58% to $5.9 billion, weighed down by amortization and restructuring costs. Even tax breaks from stock-based compensation, about $2.3 billion, played a role in softening the hit.

Going forward, Broadcom will see quicker expansion in FY26, owing to AI orders and VMware subscriptions. However, the cost of the stocks makes them appear expensive as opposed to the Marvell Technology (MRVL). The stock appears to be nothing so much of a sure win as it has a momentum on one side, and debt on the other.