Broadcom’s Profitability Concerns Overshadow Robust AI Performance

Broadcom US11135F1012

Despite delivering another quarter of impressive financial results fueled by artificial intelligence demand, Broadcom shares experienced a significant sell-off. The market's focus has shifted decisively from top-line growth to the sustainability of profit margins, questioning not if the company will grow, but how profitably it can do so.

For its fiscal fourth quarter of 2025, Broadcom surpassed Wall Street's elevated expectations. Revenue climbed 28% year-over-year to $18.02 billion, notably exceeding consensus estimates of approximately $17.5 billion. Adjusted earnings per share saw an even sharper increase, jumping 37% to $1.95.

The semiconductor segment dedicated to AI remains the primary growth engine, with related sales soaring 74% to $6.5 billion for the quarter. CEO Hock Tan emphasized the company's substantial visibility, highlighting an AI-related backlog worth $73 billion, which provides an order pipeline covering roughly 18 months.

However, investor enthusiasm was quickly tempered by commentary on future profitability. CFO Kirsten Spears indicated that the company's consolidated gross margin could contract by approximately 100 basis points, or about one percentage point, in the upcoming quarter compared to the prior period. This anticipated pressure stems from a shifting product mix. The company is selling a growing volume of custom AI chips (ASICs) to hyperscale clients like Google and Meta—a hardware business with lower margins that is expanding faster than the highly profitable software division centered on VMware.

Management's outlook for the first quarter of fiscal 2026 remains confident on revenue. Broadcom provided guidance of around $19.1 billion, well above the analyst consensus of $18.3 billion. AI revenue is projected to nearly double year-over-year to $8.2 billion. Nevertheless, the dominant narrative in the market has become fear of "margin dilution"—a potential erosion of profit per dollar of revenue—triggering pronounced profit-taking.

Sector Sentiment Amplifies Stock Decline

The severity of the share price reaction also reflects the context of a preceding powerful rally. Measured in euros, the stock had still advanced approximately 36% since the start of 2025 and more than 77% over a twelve-month horizon. Following such a run, expectations were sky-high, making any hint of margin compression particularly impactful.

Furthermore, a tense sentiment has gripped the AI hardware sector. Just a day earlier, Oracle shares sold off sharply on concerns over capital expenditure and data center delays. This negative contagion is now affecting other beneficiaries of the AI infrastructure build-out. Broadcom is feeling this pressure alongside peers like Nvidia and AMD, whose shares also declined several percentage points.

Fundamentally, demand for AI infrastructure remains robust. A new $11 billion multi-year supply agreement with AI company Anthropic, scheduled for late 2026, underscores this ongoing trend. The current market doubt centers less on the persistence of growth dynamics and more on the profit margins at which this long-term expansion can be achieved.

Analysts Maintain a Positive Fundamental View

Despite the equity market setback, the fundamental picture is largely viewed as strong. The solid quarterly figures, massive order backlog, and concrete multi-billion-dollar commitments for coming years support the thesis that Broadcom continues to play a pivotal role in AI infrastructure expansion.

Consequently, numerous analysts are defending the stock. Firms including Mizuho and KeyBanc have even raised their price targets following the earnings report, with some reaching as high as $500. They interpret the share price decline as an exaggerated reaction to a temporary product-mix effect on margins, not an indication of a structural flaw in the business model.

For the upcoming quarters, one metric will be under intense scrutiny: the gross margin. If Broadcom can stabilize this margin pressure while its AI business continues vigorous growth and the VMware integration progresses, the current pullback may later be viewed as a pause for breath after a powerful advance, rather than the start of a fundamental breakdown in the investment story.