UK investors have been piling into Broadcom (NASDAQ: AVGO) shares since they crashed (more than 20%) after its earnings report. Last week, they were among the most bought shares on AJ Bell.

Is this a smart move? I think so – I’ve actually been making this trade myself.

Earnings were actually very strong

After Broadcom posted its earnings for Q2 last week, its share price was hammered. However, the results were actually very strong.

For the quarter, revenue came in at $22.2bn, up 48% year on year. Meanwhile, non-GAAP net income was $12bn, up 55%.

Zooming in on the AI chips side of the business, revenue here grew 143% to $10.8bn. In its earnings release, the company said this growth was driven by increasing demand for custom AI accelerators and AI networking.

Looking ahead, Broadcom said it expects semiconductor revenue from AI to grow by more than 200% to $16bn in Q3. Overall revenue for the current quarter is expected to be around $29.4bn, an increase of 84% year on year.

Why did the share price tank?

Now, despite these incredible growth figures, the market wasn’t impressed with Broadcom’s earnings and the stock tanked. It seems that investors were expecting a slightly higher forecast for Q3 AI revenue (around $17.2bn).

To my mind, that’s focusing too much on the short term and not looking at the big picture (the growth of the data centre/AI industry). That said, Broadcom’s share price had seen a huge run and so there was no margin for error.

Analysts have raised their price targets

What stands out to me about the earnings is that since they were posted, Wall Street analysts have actually been raising their price targets for Broadcom. I see increases from over 15 different firms.

Several firms have gone to $550 or higher (almost 40% above the current share price). This reinforces my view that there’s a disconnect between the fundamentals and the share price.

How does the valuation look?

In terms of the valuation, it looks attractive to me after the share price fall. With analysts forecasting earnings per share of $19 for the financial year starting in November, the forward-looking price-to-earnings (P/E) ratio’s only around 21.

I see value at that multiple, especially when the rate of earnings growth is considered. With earnings per share forecast to grow 66% next financial year, the price-to-earnings-to-growth (PEG) ratio’s only 0.32 (a ratio under generally signals that value is on offer).

What are the risks?

Now, of course, there’s no guarantee the company will be able to generate $19 per share in earnings next year. A slowdown in AI spending from its major customers (Google, Anthropic, Meta) could put a spanner in the works.

With hyperscalers projected to spend over $1trn on AI in 2027 however, I’m optimistic in relation to the growth story here. In my view, this chip stock’s worth a closer look after its share price pullback.

Should you invest £5,000 in Broadcom right now?

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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Broadcom made the list?

Edward Sheldon owns shares in Broadcom