Broadcom Shares Face Market Skepticism Despite Bullish Analyst Call

Broadcom US11135F1012

A significant divergence has emerged between Broadcom's stock performance and a major analyst's outlook. Despite a substantial upgrade from Morningstar on Thursday, which labeled the equity as presenting an "exceptcellent opportunity," Broadcom's market value has shed approximately one-fifth over just a few trading days. This apparent contradiction highlights a classic market tension: immediate concerns over profitability margins are clashing with long-term optimism surrounding the company's role in artificial intelligence infrastructure.

The proximate cause for the recent sharp decline was management's forward guidance. On December 11, Broadcom reported quarterly revenue and profit that exceeded Wall Street's forecasts. However, executives tempered expectations regarding future margins. The explanation centers on a rapid shift in the company's business mix. Its burgeoning custom AI chip segment, serving hyperscalers like Google and Anthropic, is expanding at a fast pace but operates with lower profitability than the firm's established software operations.

This structural change has unsettled investors. The decline was further amplified by broader sector weakness. Quarterly results from competitor Micron Technology, released Wednesday evening, triggered a wave of profit-taking across semiconductor stocks, even though Micron's sales figures were robust. As a stock often viewed as a bellwether for AI infrastructure spending, Broadcom was caught in this sector-wide downdraft.

From a technical analysis perspective, the share price has broken below key support levels, including its 50-day moving average. The stock's volatility currently stands at an annualized rate of 58 percent.

The Bull Case from Morningstar

In contrast to the market's reaction, Morningstar analyst William Kerwin significantly raised his fair value estimate for Broadcom on Thursday, moving it from $365 to $480 per share. This new target implies an upside potential of roughly 70 percent from current trading levels. Kerwin's thesis argues that the market is overly focused on near-term margin compression and is discounting the fundamental growth story.

The key pillars of this bullish analysis include:

• Leadership in Custom AI Chips: Broadcom is estimated to command an 89 percent market share in custom ASIC designs.
• Major New Contract: The company secured an $11 billion AI chip order from Anthropic.
• Strong Cash Generation: Annual free cash flow of approximately $20 billion provides ample capacity to manage its $65 billion debt load.

Morningstar's four-star rating on the shares indicates a view that they are moderately undervalued.

The Path Forward

The coming weeks will likely determine whether the fundamental or the technical narrative prevails. A critical focal point will be Broadcom's execution on its announced $8.2 billion in AI-related revenue, slated for the first quarter of fiscal 2026. For investor sentiment to shift decisively, the company will need to demonstrate that the sheer volume growth of its AI business can more than offset the percentage-based margin decline, leading to higher absolute profits.