Broadcom’s Stock Plunge Meets a Wall of Analyst Optimism

Broadcom US11135F1012

A curious divergence is unfolding around Broadcom. Despite the technology giant reporting quarterly results that handily surpassed expectations on December 11, its shares subsequently entered a steep decline, shedding roughly 20% of their value from a record high of $414.61 to trade near $330. In stark contrast, Wall Street's research desks have responded with a wave of bullish price target increases, creating a significant rift between market sentiment and analyst conviction.

The post-earnings period has seen a notable chorus of analyst upgrades. Truist Financial set the tone on December 19, raising its target to $510, implying a potential 54% upside from recent levels. This move was part of a broader trend. Firms including Bank of America, Barclays, and KeyCorp each established price objectives of $500. Benchmark lifted its target from $385 to $485, while UBS reaffirmed a "Buy" rating with a $475 target. The consensus price target now stands above $436, with post-earnings estimates averaging approximately $468—nearly $100 above the stock's current trading price.

This analyst optimism is grounded in a robust financial performance for the fourth quarter of fiscal 2025. Broadcom's results exceeded forecasts across key metrics:

• Revenue: $18.02 billion, beating the $17.46 billion expectation and marking a 28% year-over-year increase.
• Adjusted Earnings Per Share: $1.95, above the anticipated $1.87.
• AI Semiconductor Revenue: Surged 74% compared to the prior year.
• Infrastructure Software Revenue: Reached $6.94 billion, a 26% gain.
• Net Income: Doubled year-over-year to $8.51 billion.

The company's AI business is a particular standout. Management projected revenue from this segment would double again in the current first quarter of the new fiscal year to $8.2 billion. They also announced securing a fifth customer for custom AI chips and confirmed Anthropic as a major buyer through Google's TPU technology.

The Catalyst for the Sell-Off

The driver behind the stock's decline appears to be a shift in profitability outlook rather than top-line weakness. Company guidance for the current quarter indicated an expected contraction in gross margin of approximately 100 basis points. Management attributed this to the growing revenue mix from lower-margin AI hardware, which dilutes the high profitability of the software division. For some investors, this hint of margin pressure was sufficient to spark concerns over long-term profitability, despite the relatively modest scale of the anticipated change.

Operationally, Broadcom's position remains strong. The company generated nearly $7.5 billion in free cash flow last quarter and reduced its long-term debt by $1 billion. The backlog for its infrastructure software climbed to $73 billion, up from $49 billion a year ago.

Distinguishing Fundamentals from Sector Noise

Some market observers have drawn comparisons to Oracle, whose disappointing results in early December fueled doubts about the AI sector's momentum. However, fundamental differences between the two companies are pronounced. While Oracle reported negative free cash flow of $10 billion and an $18 billion increase in debt, Broadcom continues to produce substantial cash surpluses and is actively reducing its liabilities. Reflecting this disparity, analysts cut Oracle's price targets by an average of 18% post-earnings, whereas all revisions for Broadcom were upward.

In a further sign of confidence, Broadcom's board approved a 10% increase in the quarterly dividend to $0.65 per share, marking the 15th consecutive year of dividend growth. The ex-dividend date is December 22. This positive signal is somewhat tempered by insider sales of over 825,000 shares worth $299 million during the last three months.

With a market capitalization of approximately $1.56 trillion and a price-to-earnings ratio of 69, the stock's valuation remains elevated. The company maintains a return on equity of 37% and a net profit margin of 36%. Institutional investors hold about 76% of the shares. The next significant test will come on March 5 with the release of first-quarter results, which will reveal whether the analysts or the broader market's initial reaction was justified.