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Broadcom Stock Tumbles After Earnings. Why Its Booming AI Business Was an Issue.

Dec 11, 2025 01:00:00 -0500 by Tae Kim | #AI #Earnings Report

Wall Street wants to hear what Broadcom has to say about the artificial-intelligence chips market. A Broadcom office in San Jose, Calif. (Justin Sullivan/Getty Images)

Key Points

Broadcom posted better-than-expected earnings for its October quarter late Thursday, but the stock was trading lower Friday. The market is fretting about the pace of growth in its artificial-intelligence chip business and its effect on margins.

Broadcom’s semiconductors compete in several categories, including networking, broadband, server storage, wireless, and industrial. The company is also a leader in the market for high-end AI application-specific integrated circuits, or AI ASICs.

The AI chip business is the major motor of Broadcom’s growth at the moment. The company expects its current quarter AI semiconductor revenue to double year-over-year to $8.2 billion.

However, CEO Hock Tan noted AI revenue has lower gross margins than its other businesses.

“We expect Q1 consolidated gross margin to be down approximately 100 basis points sequentially, primarily reflecting a higher mix of AI revenue,” Tan told analysts on an earnings call. “Consolidated gross margins through the year will be impacted by the revenue mix of infrastructure software and semiconductors, and also product mix within semiconductors.”

Broadcom stock was down 11% at $360.30 at 11:11 a.m. on Friday, its largest drop since Jan. 27, while the S&P 500 had fallen 1.3%, the Nasdaq Composite had dropped 2%, and the Dow Jones Industrial Average had declined 0.5%. Shares of Broadcom had risen nearly 75% this year as of Thursday’s close, compared with a 22% gain for the Nasdaq.

Trusit Securities analyst William Stein estimated that the shift toward AI hardware will take Broadcom’s enterprise gross profit margin down to 74% in its fiscal 2026, down from 78.6% in fiscal 2025. Still, that didn’t stop Stein from raising his target price on the stock to $500, from $365, while keeping a Buy rating.

“We think the higher EPS [earnings per share] overwhelms the GPM impact, but we recognize this metric is critical for many semi investors,” Stein wrote.

In September on the last earnings call, Tan announced his company had secured $10 billion in AI orders from a new qualified customer, which he said would “significantly” improve the AI revenue outlook for fiscal 2026.

On the earnings call Thursday evening, Tan identified the customer as Anthropic, noting that the AI model start-up ordered an additional $11 billion of AI chips for delivery in late 2026. Anthropic is buying Tensor Processing Units, which Broadcom jointly develops with Google.

Tan also said there was a fifth customer for AI chips which ordered $1 billion of chips for delivery in late 2026. He said Broadcom’s AI order backlog now totals $73 billion, which the company expects to be delivered over the next 18 months.

Created with Highcharts 9.0.1BroadcomStock ticker: AVGOSource: FactSet

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Investors may have been hoping for more on the customer front. Broadcom shares, which were up 3% following the earnings report, turned negative during the conference call.

“At forty-plus times earnings, Broadcom isn’t priced for slip-ups. That valuation alone presents a high hurdle for the stock to trade higher,” said Jake Behan, head of capital markets at Direxion.

Other potential concerns included stalling non-AI revenue and the fact that Tan said Broadcom doesn’t expect much business to come from ChatGPT-developer OpenAI next year, with the two companies’ partnership expected to ramp up from 2027.

“This was a generally positive update as we were pleased to see continued upside in custom XPUs, though we hope Broadcom can pin down its opportunity with OpenAI,” wrote Susquehanna analyst Chrisropher Rolland, who kept a Positive rating and $450 target price on the stock.

For its fiscal fourth quarter, the company reported revenue of $18.02 billion versus the Wall Street consensus of $17.5 billion, according to FactSet. Adjusted earnings came in at $1.95 per share, above analysts’ consensus estimate of $1.87 per share.

For the current quarter, Broadcom guided to $19.1 billion in revenue, compared with analysts’ expectations of $18.4 billion. The company also announced a 10% increase to its quarterly common stock dividend to $0.65 per share for fiscal 2026.

Write to Tae Kim at tae.kim@barrons.com and Adam Clark at adam.clark@barrons.com