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over the past decade broadcom has been an undervalued dividend growth machine however once the AI boom happened in 2023 broadcom stock price soared nearly 200% personally I believe much of this has been unjustified by the fundamentals in fact I sold out of my broad composition at large gains after the Q2 earnings report in June 2024 and just today broadcom stock reported Q3 earnings and much of the reasons why I sold at Q2 are still in play today I think broadcom went from being a deeply undervalued company to a highly overvalued stock and despite beating their Q3 earnings expectations on both earnings per share and revenue the stock price is down over 65% after hours that would bring the price of broadcom stock down over 22% from its recent all-time high in today's video I'm going to analyze broadcom's latest earnings report and explain why the stock is selling off and finally I'll share why I think broadcom stock is not the AI stock many people think it is let's roll the intro my name is Zach this is dividend data and you should leave a like And subscribe to the channel if you enjoy the video please sign up for my free email newsletter if you want help finding better dividend stocks broadcom ticker symbol avgo was priced at $152 per share prior to releasing earnings today their Gap PS over the trailing 12 months was $2.33 giving it a 65.5 p ratio now to be fair their non-gaap EPS over the trailing 12 months would be closer to $440 giving it about a 35p ratio the current annual dividend per share is $210 giving it a 1.37% dividend yield and the company is currently valued at $711 billion and I've covered broadcom stock before many times on the channel the company has evolved significantly over time and the latest big change here was the acquisition of VMware in 2023 in fiscal 2024 this has started being folded into their business and now you can see that infrastructure software represents around 40% of their total revenue with semic conductor Solutions representing around 60% and of that semiconductor Solutions business much of that is unrelated to AI in fact the only Parts related to AI are in the networking side of the business and this includes things like ethernet switching routing Etc and all of these are required in the build outs of these large hyperscale data centers so they have been seeing big demand increases in that area however their other large semiconductor businesses are in Broadband Wireless industrial and storage and these business segments have actually been declining recently so let's break down the latest quarter Revenue came in at $13 billion which is up $ 47% from the prior year period now hey that seems great but there is a massive butt in that number virtually all of that Revenue increase is from the VMware acquisition VMware was a public company and in fiscal 2023 they had $13.3 billion of annual revenue so when we look at all these year-over-year growth rates for these various Financial metrics you need to keep in mind that a vast majority of these gains are from the VMware acquisition and that did not come at no cost in fact broadcom's balance sheet has gotten far worse as a result of the acquisition their net debt went from $25 billion to $64 billion they now have $9.8 billion of cash and $74 billion of total debt on top of that their shares outstanding increased slightly and they've seen their margins declin as a result of absorbing the VMware business which was a lower margin business gross margins are down from 68% to 56% net margins are down from 38% to 16.9% so yes we are seeing large year-over-year growth in some Financial metrics but that was not without a cost in the quarter they had a gap net loss of $1.8 billion in the third quarter now this is not financially notable in my opinion because that comes from a non-cash tax provision of $4.5 billion in the quarter so this has nothing to do with the cash in cash out of the business if we look at non-gaap net income it came in at 6 .1 billion for the third quarter which was actually very strong cash from operations came in at $4.9 billion for the third quarter less Capital expenditures of $172 million resulting in $4.7 billion of free cash flow or about 37% of their total revenue and this is one thing that I loved about broadcom stock is how much free cash flow they generate since they are a chip designer getting manufactured by third-party Fabs they actually don't have to continually invest into this highly expensive semiconductor manufacturing and historically this has made broadcom a free cash flow machine and that's why I loved the stock they would be raking in $4 billion a quarter that they can put towards dividends and their next big acquisition and this was a proven strategy that led to continued growth at broadcom now the good thing with broadcom stock is they are giving guidance of continued growth projecting approximately $14 billion of revenue for Q4 and again a lot of this is from the VMware acquisition I suspect it would be closer to 10% growth year-over-year excluding that but the VMware acquisition is not why broadcom stock is up it has to do entirely with the AI story however that is not what I think a lot of people think it is the CEO hwan who I like and think has done a fantastic job throughout his career said for the quarter that broadcom's third quarter results reflect continued strength in our AI semiconductor Solutions and VMware we expect revenue from AI to be $12 billion for the fiscal year 2024 driven by ethernet Network netw working and custom accelerators for AI data centers now I'm going to repeat that part driven by ethernet networking and custom accelerators for AI data centers so this is their networking business and the networking business has been one of their segments in semiconductors for a while however it has been seeing ample growth in recent years due to the AI data center demand and they have now renamed this the AI semiconductor Solutions when really it is their networking business so I really would not say that they are a leader in Ai and I think at best which they say in some of their presentations is that they're enabling AI infrastructure with their products now the bright spot for broadcom is they actually were a leader in Ethernet and networking prior to the AI boom so they do have that advantage of all these customer relationships and they do have a wide Suite of products in use so broadcom is a lot more focused on this use case since that's where the money's at right now and they're helping design various AI acceler ators and all these different products to help secure their place in the data center and it's true that networking is extremely important in these large data centers however when we go back to look at broadcom as a whole there are a couple of major things to focus on one this used to be a small part of their semiconductor business which is only 60% of their entire business so in 2023 this was 15% of their semiconductor revenue and in 2024 it's going to be over 35% of that revenue and yes it's seeing significant growth but part of it is also that their other semiconductor businesses like Wireless and Broadband are actually declining this year too but from an investor standpoint into broadc comp this is great it's a high growth business in their semiconductor business and I do think this will continue to grow into the coming years however I do not think they have any unique competitive advantage in the space I'm not an expert in networking though but when you compare broadcom to a company like Nvidia it's not even close which is more of a an AI story and Nvidia is in a far stronger competitive position compared to broadcom when it comes to AI data centers nvidia's business has become almost entirely around the data center and it's incredibly high margin and they have these bundled package Solutions in the h100 h200 and all these various products and the coming Blackwell product and if I'm being honest it's almost insulting to even put broadcom in the same breath of Nvidia when it comes to talking about investing in AI so broadcom over the past year and a half has has been seeing this AI premium when it comes to price but has not nearly been seeing the earnings and business growth that companies like Nvidia have it's not even close in fact their free cash flow per share has actually been declining and in my opinion much of the stock price growth around broadcom has been unjustified hence why I sold the stock however broadcom is still a great company and if you bought it a while ago and want to continue holding it and reinvesting dividends there's nothing wrong with that I'm not trashing on your investment I personally just think it's interesting how it went from a deeply undervalued company to all of a sudden an overvalued stock in my opinion if you enjoyed the video please leave a like comment subscribe to the channel and I'll see you next time if you want to find 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