Broadcom’s Market Plunge: A Short-Term Overreaction to AI Growth?

Broadcom US11135F1012

Last Friday delivered a brutal shock to shareholders of semiconductor giant Broadcom. The stock plummeted over 11% in a single session, wiping approximately $200 billion from the company's market valuation in a matter of hours. This dramatic sell-off was triggered by intense investor anxiety over future profitability. As the new trading week begins, however, prominent analysts are challenging the market's verdict, asking whether the panic was premature given the explosive trajectory of artificial intelligence (AI) revenue.

The irony of the sharp decline lies in Broadcom's otherwise robust quarterly report. The company posted year-over-year revenue growth of 28%, reaching $18.02 billion, and exceeded expectations for earnings per share. The negative market reaction was solely attributable to forward-looking commentary on profit margins.

Company leadership cautioned that its revenue mix is increasingly shifting toward custom AI chips (ASICs). These hardware components traditionally carry lower margins compared to its legacy software businesses, such as VMware. Consequently, management forecasts a gross margin contraction of roughly 100 basis points. For a stock trading at a premium valuation—with a price-to-earnings ratio significantly above the Nasdaq-100 average—this projected "dent" in profitability was enough to spark a wave of selling. On a weekly basis, the equity is showing a loss of approximately 10.6%.

Analysts Push Back, Emphasizing Scale Over Margin

In a direct rebuttal to the market's fears, several Wall Street firms have come to Broadcom's defense. Leading the charge is Morgan Stanley analyst Joseph Moore, who reaffirmed his "Overweight" rating on Monday morning and even raised his price target. The core argument from proponents is clear: sheer volume will outweigh margin compression.

Broadcom's guidance projects a doubling of AI-related revenue to $8.2 billion for the first quarter of 2026. This ambitious forecast is supported by a massive $73 billion order backlog scheduled for delivery over the next 18 months. Some institutional investors appear to share this long-term view; funds like Munro Partners have recently established new positions. Furthermore, the board has signaled confidence by announcing a 10% increase in the quarterly dividend.

This dividend action sets a specific date for shareholders' calendars: the stock will trade ex-dividend on December 22, 2025, with the payment distributed before year-end. In the intervening period, the market will likely continue to debate whether the long-term potential of Broadcom's AI dominance ultimately overshadows near-term concerns about profitability.