US AI data center expansion hits critical power supply bottleneck; construction delays and local restrictions intensify grid capacity crisis.
Broadcom's CEO Hock Tan is running a chip company with the cash mechanics of a software business, which is precisely why I keep buying the stock. Wall Street worries that AI capital spending will compress free cash flow across the semiconductor sector, but Broadcom delivers a receipt every 90 days proving otherwise.
In fiscal Q2 2026, Broadcom generated $10.262 billion in free cash flow, representing 46% of revenue. Full fiscal 2025 free cash flow reached $26.914 billion, up 38.63% year over year. Capital expenditures totaled just $623 million against $27.5 billion in operating cash flow—a semiconductor company converting revenue to owner cash at software-like ratios.
On the June earnings call, Tan stated: "Broadcom achieved record revenue, operating profit and free cash flow in Q2 driven by accelerating growth in AI semiconductor revenue and strong operating leverage." Adjusted EBITDA margin hit 69% of revenue, with operating margin at 67%. These are toll-road economics, the kind software businesses print.
Visibility compounds the case. Broadcom entered 2026 with an AI backlog exceeding $73 billion. In Q2 alone, the company booked $30 billion in AI orders against $10.8 billion in shipments. Q3 AI revenue is guided to $16.0 billion, up over 200% year over year. Tan reiterated a goal to exceed $100 billion in AI semiconductor revenue in 2027. Layering in the $30 billion-plus Apple custom AI chip deal running through 2031 clarifies the shape of cash flows funding years of dividend increases ahead.
That dividend has marked 15 consecutive annual increases since fiscal 2011. Q2 dividends paid $3.1 billion. Q1 buybacks reached $7.8 billion. The company is returning cash while investing in a decade-long AI ramp.
The operational stabilizer many overlook is VMware. Infrastructure Software delivered $7.178 billion in Q2 at 93% gross margin, with ARR growth of 17%. That recurring software cash effectively subsidizes the 2nm R&D bill without diluting shareholder returns.
When retirement accounts ask about NVIDIA and Advanced Micro Devices, I note that AMD's AI revenue trajectory sits near $5 billion annually versus Broadcom's $10.8 billion in Q2 alone. Broadcom owns the custom-silicon franchise: Google, Meta, OpenAI, and Anthropic have all contracted for gigawatts of Broadcom-powered compute.
Customer concentration is real. A handful of hyperscalers drive the AI segment, and at a P/E of 61, there is no room for stumbles. The stock has drawn down from $495 at the Q2 filing to $378.16 today—precisely why I am adding. Eight consecutive EPS beats tell me operational execution remains intact while the multiple compresses.
As long as this company converts nearly half its revenue into free cash and returns it to shareholders, I will keep buying every dip the market provides.