Broadcom’s AI Ambitions Fuel Analyst Confidence Despite Margin Shifts

Broadcom US11135F1012

Following a notable decline in its share price late last week, Broadcom's long-term strategic positioning in artificial intelligence is reclaiming investor attention. Major financial institutions have revised their models, resulting in increased price targets for the semiconductor giant. This renewed optimism is primarily driven by the company's substantial and confirmed AI-related order backlog, which analysts believe provides exceptional visibility into future revenue streams.

In a recent move, Bank of America Securities reaffirmed its Buy rating on Broadcom shares while lifting its price objective from $460 to $500. This adjustment comes after the stock retreated approximately 11% in the wake of its fourth-quarter fiscal 2025 earnings report. Concurrently, the bank raised its per-share earnings projections for fiscal years 2026 and 2027 by 8%, to $10.33 and $14.40 respectively.

Citi also updated its assessment, boosting its target from $415 to $480. Both firms cite the high degree of predictability within Broadcom's AI segment as the core rationale for their more bullish stance. Company leadership has confirmed an order backlog dedicated solely to AI products worth "at least" $73 billion.

Revenue Growth and Margin Dynamics

The recent stock volatility is closely tied to evolving profitability metrics. While revenue continues to expand, the profit generated per dollar of sales has seen some compression. For the first quarter of fiscal 2026, Broadcom anticipates a gross margin of approximately 76.9%, compared to 79% in the year-ago period.

This shift is attributed to the rapid expansion of its business in custom AI accelerator chips (ASICs) for major cloud and AI providers, including Google, Meta, and OpenAI. These products typically carry lower margins than the company's established software and networking equipment divisions. Consequently, Bank of America adjusted its gross margin forecast down to 73% for 2026 and 71% for 2027. However, analysts emphasize that the sheer volume of the AI business is expected to drive significant absolute profit growth.

The Scale of AI-Driven Transformation

Broadcom's fiscal Q4 2025 results underscore the magnitude of its strategic pivot. Total revenue reached $18.02 billion, marking a 28% year-over-year increase. Revenue specifically tied to AI surged 74% to roughly $6.5 billion.

Looking ahead, management projects AI-related revenue for Q1 2026 will double from the prior-year quarter to about $8.2 billion. The company has also secured new major orders, including a significant expansion of its engagement with AI startup Anthropic, which now represents a cumulative $21 billion in commitments.

Key Financial Data and Projections:

• Revised Price Targets: Bank of America: $500; Citi: $480
• Q4 FY2025 Revenue: $18.02 billion (+28% year-over-year)
• Q4 AI Revenue Growth: +74% to approximately $6.5 billion
• Confirmed AI Backlog: $73 billion
• Dividend: Quarterly payout raised 10% to $0.65 per share
• Q1 FY2026 Outlook: Total revenue forecast of $19.1 billion

Strategic Dominance and Forward Trajectory

Broadcom currently holds a commanding position in the market for custom AI accelerators and Ethernet networking solutions, estimated to control 70% to 80% of the custom AI chip segment. Its three-pillar "AI Trifecta" strategy—encompassing custom accelerators (XPUs), networking technology, and VMware software—generated a substantial free cash flow of $26.9 billion in fiscal 2025.

The immediate focus is on executing the $73 billion AI backlog over the next six quarters. Company executives anticipate that new order intake will continue to accelerate throughout 2026. While the altered margin profile remains a point of discussion, the central thesis behind the recent price target increases is the anticipated robust growth in both revenue and earnings per share, underpinned by the existing AI contract pipeline.