Broadcom Shares Plunge Amid Profitability Concerns Despite Record Results

Broadcom US11135F1012

A paradoxical scenario unfolded for Broadcom this week. The semiconductor giant reported quarterly figures that shattered expectations, yet its stock experienced its most severe decline in five years. This investor reaction highlights a growing market anxiety: the explosive growth in artificial intelligence (AI) revenue may be coming at a significant cost to the company's bottom-line profitability.

Broadcom's financial performance for the period appeared robust on the surface. Quarterly revenue ascended to $18.02 billion, and earnings per share of $1.95 surpassed Wall Street's forecasts. However, these headline numbers were overshadowed by a critical detail confirmed by CEO Hock Tan. The company anticipates a contraction in its gross margin by approximately 100 basis points in the upcoming quarter, a forecast that triggered a swift and severe market response.

Over a three-day trading span, the stock plummeted nearly 20%. Having recently touched a 52-week high of 353.15 euros, shares now trade notably lower, around the 285-euro mark.

The AI Growth Paradox: Revenue vs. Margins

The core issue unsettling investors is a fundamental shift in Broadcom's business mix. While AI is driving tremendous top-line expansion, it is doing so with thinner profit margins compared to the firm's established software and networking segments.

• Explosive AI Growth: Revenue from AI products surged 74% year-over-year to reach $8.2 billion.
• Pricing Power Disparity: Unlike Nvidia, which commands significant pricing power with its GPU dominance, Broadcom's custom AI chips (ASICs) often involve high-volume agreements with a concentrated set of major clients, such as Google and Meta. These large customers can negotiate more aggressive pricing terms, pressuring margins.
• Sector-Wide Jitters: This dynamic echoes recent concerns that have also weighed on other firms like Oracle, raising broader questions about whether the AI boom will translate into profitability levels seen in prior technology cycles.

Analyst Perspective and Forward Path

Despite the short-term volatility and loss of investor confidence, the long-term outlook from some market experts remains constructive. Analysts at UBS, for instance, project that Broadcom's AI semiconductor revenue could triple by 2026.

The immediate challenge for management is clear: demonstrating an ability to stabilize margins through operational efficiencies and cost management as the AI segment continues its rapid expansion. In the near term, however, volatility is expected to persist. Traders are closely watching to see if technical support levels hold in the range of $335 to $340, a key zone for the stock's price stability.