Broadcom’s AI Surge Meets Margin Concerns: A Market Dilemma

Broadcom US11135F1012

Semiconductor leader Broadcom recently delivered the kind of performance that typically sends investors into a buying frenzy: record-breaking revenue and explosive growth in its artificial intelligence division. Yet, the market's reaction has been surprisingly muted, with shares retreating significantly from recent peaks. Ironically, the source of investor unease stems directly from this success and a concurrent warning about future profitability.

From a fundamental perspective, Broadcom's operational engine is firing on all cylinders. For its fiscal 2025 fourth quarter, the company reported a 28% surge in total revenue, reaching $18 billion. The standout performer was the AI semiconductor segment, where sales skyrocketed an impressive 74% to $6.5 billion.

The forward outlook remains exceptionally aggressive. CEO Hock Tan has forecast that AI-related revenue will double to $8.2 billion in the upcoming quarter. The company's order book provides substantial evidence for this confidence, with a staggering $73 billion in AI product bookings scheduled for delivery over the next 18 months. A significant vote of confidence came from AI specialist Anthropic, which expanded its total orders with Broadcom to $21 billion.

Profit Margin Guidance Dampens Enthusiasm

Despite closing Friday's session with a 3.20% gain at €290.30, Broadcom shares are down for the week. The stock has lost considerable ground since hitting its 52-week high of €353.15 on December 10. This pullback was primarily triggered by management's guidance concerning profit margins.

For the first quarter of fiscal 2026, Broadcom anticipates its gross margin will contract by approximately 100 basis points. This expected pressure is attributed to a shifting product mix. The company is selling increasing volumes of AI hardware, which carries lower profitability compared to its extremely lucrative software division. Investors are concerned that breakneck revenue growth may come at the expense of overall profitability. Sentiment across the chip sector was further weighed down by reports detailing technological advances from Chinese competitors.

Analysts Maintain a Bullish Long-Term View

The divergence between Broadcom's operational strength and its recent share price correction has drawn commentary from market analysts. Even as the stock declined, numerous experts raised their price targets following the earnings report. Institutions including Barclays and Bank of America see fair value for the equity as high as $500. The prevailing market consensus suggests significant upside potential from current trading levels.

Management has sent an additional signal of confidence to shareholders by raising its dividend for the 15th consecutive time. Whether the stock can swiftly resume its upward trajectory will likely depend on how the market balances two factors: the enormous volume growth in AI against what may be a temporary period of margin compression.