Broadcom’s AI Ambition Meets Market Skepticism Over Profit Margins

Broadcom US11135F1012

Despite posting record-breaking financial results and issuing a bullish forecast, Broadcom shares experienced a significant sell-off. The market's reaction highlights a central tension: the trade-off between explosive growth in artificial intelligence semiconductor sales and the potential dilution of the company's traditionally robust profitability metrics.

For its fiscal fourth quarter, Broadcom delivered results that comfortably exceeded Wall Street's expectations. The company reported double-digit growth in both revenue and profit, with sales from its AI segment showing particularly explosive momentum.

Key financial highlights from the report include:

• Quarterly Revenue: $18.02 billion, representing 28% year-over-year growth and surpassing consensus estimates.
• Adjusted EPS: $1.95, a 37% increase from the prior-year period.
• GAAP Net Income: $8.51 billion, nearly doubling year-over-year.
• AI Semiconductor Revenue: Soared 74% compared to the previous year.

For the full fiscal year, Broadcom generated $63.9 billion in revenue, up 24% from 2024. Adjusted EBITDA climbed 35% to $43.0 billion, while free cash flow reached $26.9 billion—all historic highs for the company.

Management's outlook for the current quarter remains aggressive. CEO Hock Tan projected:

• Q1 revenue of approximately $19.1 billion, above the analyst consensus of $18.3 billion.
• AI semiconductor revenue is expected to double year-over-year to $8.2 billion.
• An adjusted EBITDA margin of 67% on the forecasted revenue.

Tan emphasized that growth is being driven by custom AI accelerators and Ethernet AI switches, with this momentum anticipated to continue into the first quarter.

The Margin Dilemma Takes Center Stage

The positive financial news was overshadowed during the earnings call by a warning regarding gross margins. This guidance triggered a reversal in the stock's after-hours trajectory, leading to substantial declines in the following trading session.

The core issue is an anticipated sequential decline in gross margin for Q1 of approximately one percentage point. Management attributed this pressure directly to the rising mix of AI-related business, noting that custom AI processors carry lower margins than the company's established software portfolio.

While CFO Kirsten Spears underscored Broadcom's powerful cash generation, investor focus locked onto the impending margin compression. This concern is amplified by the company's substantial $73 billion backlog for custom chips, switches, and other AI data center products scheduled for delivery over the next 18 months. While this backlog secures future growth, it also intensifies the near-term margin narrative.

The stock's reaction was pronounced. Having retreated roughly one-fifth from its early December peak, shares fell nearly 20% over the past week alone. This decline brought the share price to €277.50, about 21% below its 52-week high, though it remains comfortably above its 200-day moving average.

Strategic AI Developments and Shareholder Returns

Beyond the financials, Broadcom provided several strategic updates related to its AI business, particularly in custom accelerators.

Expanding the Custom Chip Roster

The company announced it has secured a fifth major customer for its bespoke AI accelerators. It also identified a previously unnamed client: the AI firm Anthropic, which has placed a $10 billion order for Google's TPU chips. Anthropic is utilizing Google's latest TPU generation, codenamed Ironwood. Broadcom refers to these specialized chips as "XPUs," highlighting a trend where large customers develop proprietary accelerators to control their technological roadmaps more directly.

A separate partnership with OpenAI to develop custom chips is also underway. However, CEO Hock Tan tempered near-term revenue expectations from this collaboration, indicating only a modest contribution is expected in fiscal 2026.

Commitment to Capital Returns

Alongside its AI investments, Broadcom maintained its shareholder-friendly capital allocation policy. The board approved a 10% increase in the quarterly dividend, raising it from $0.59 to $0.65 per share. This brings the annualized payout to a record $2.60, marking the fifteenth consecutive annual dividend increase since 2011.

In the past fiscal year, Broadcom returned a total of $17.5 billion to shareholders through a combination of $11.1 billion in dividends and $6.4 billion in share repurchases.

Analyst Outlook: Elevated Targets Amid Rich Valuation

Despite the share price weakness and margin concerns, many analysts have raised their targets, focusing on Broadcom's growth trajectory and AI positioning.

• Revenue projections for fiscal 2026 have been lifted from $86 billion to approximately $96 billion.
• EPS estimates for 2026 increased from $6.43 to $7.49.
• The average price target rose by 11% to $453.

Nevertheless, the valuation remains elevated. Based on these new estimates, the forward price-to-earnings ratio stands at around 36, while the enterprise value to expected EBITDA multiple is approximately 32. The company's market capitalization hovers between $1.5 and $1.6 trillion.

Commentary from research firms contextualized the sell-off. Morningstar attributed the decline specifically to AI-chip-related margin dilution but viewed it as non-structural, noting these chips are still accretive at the operating margin level. Melius Research analyst Ben Reitzes suggested pressing a "panic button" was premature, given the continued high investment plans of Broadcom's major customers.

Sector Context and Forward Look

Broadcom's pullback occurs amid growing market scrutiny of the returns on massive AI infrastructure investments. This was echoed earlier in the week when Oracle shares fell sharply after announcing significant AI spending—a signal that investors are increasingly distinguishing between top-line growth and capital efficiency.

Despite the recent correction, Broadcom stock remains up significantly year-to-date and has outperformed the broader market for six consecutive years. Several near-term events will redirect focus to fundamentals and capital returns:

• December 22, 2025: Ex-dividend date for the increased payout.
• December 31, 2025: Dividend payment date.
• By February 1, 2026: Conclusion of the first quarter of fiscal 2026.

The next major test will be the Q1 report in early February. This release will reveal whether Broadcom delivers on its promise to double AI revenue, the actual extent of gross margin pressure, and the pace at which the $73 billion backlog converts into recognized revenue and operating profit.