BROADCOM STOCK VOLATILITY AMID AI SHIFT

AI revenue boom versus margin concerns

Broadcom’s Q4 2025 earnings on December 11 highlighted record-breaking performance, with revenue of $18.02 billion (up 28% YoY) and non-GAAP EPS of $1.95—both exceeding analyst expectations. The company’s AI semiconductor revenue jumped 74% YoY, underpinned by rising shipments of custom AI accelerators and Ethernet switches used in hyperscaler data centres.

Profitability mix under scrutiny

Despite these strong top-line results, the market responded negatively due to concerns about margins. Management guided for Q1 FY2026 gross margins of approximately 76.9%, a drop of about 100 basis points sequentially. This reflects a higher share of revenue coming from custom AI systems and silicon—products with lower gross margins (~45–55%) compared to legacy software segments like VMware, which boast margins north of 90%.

• AI revenue surge: $6.5B in Q4 2025; projected to hit $8.2B in Q1 2026 (up 100% YoY)

• Gross margin concern: Shift from high-margin software to lower-margin AI silicon fuels investor anxiety

• Custom chip customers: Partnerships with Google, OpenAI, and Anthropic strengthen AI narrative

• AI backlog visibility: $73 billion committed over next 12–18 months, per management clarification

• Valuation pullback: AVGO down ~18% from December highs; YTD gains still >50%

In essence, the market is grappling with the trade-off between near-term margin dilution and long-term dominance in AI infrastructure. Management maintains that networking (e.g., Tomahawk switches) and software margins will balance the mix longer-term.

Earnings reaction and analyst views

Broadcom's Q4 2025 earnings report reinforced its position as an AI infrastructure powerhouse, but it also sparked the steepest two-day drop in the stock in over a year. The headline numbers were strong, but investors were spooked by margin compression and the lack of multi-quarter AI profitability guidance.

Breakdown of key results

• Total revenue: $18.02B (beat consensus by ~$560M; up 28% YoY)

• AI semiconductor revenue: $6.5B (up 74% YoY)

• Adjusted EBITDA: $12.22B (68% of revenue)

• Non-GAAP EPS: $1.95 (vs. $1.86 est.)

• FY2026 Q1 revenue guide: ~$19.1B (up 28% YoY)

Despite these beats, shares fell ~11% over Dec 12–13, reflecting investor jitters over guidance. Analysts have since stepped in to defend the name. UBS, for instance, raised its price target to $475, calling the dip “a buying opportunity.” TD Cowen, Benchmark, and Piper Sandler all reiterated Buy ratings, highlighting the company’s robust AI order pipeline and strategic position in custom silicon and data centre networking.

Notably, Broadcom clarified that its $73B AI backlog is expected to be delivered over ~12 months—not 18 as initially thought—accelerating revenue recognition and easing fears about delivery lags.

AI, VMware and long-term strategy

Broadcom’s evolving strategy is centred around becoming the backbone of global AI infrastructure, combining hardware, software, and networking under one vertically integrated umbrella. This is being executed through its dual-engine growth model: explosive AI demand and steady software monetisation via VMware Cloud Foundation (VCF).

Key strategic pillars heading into 2026

• Custom AI chips: Broadcom has secured design wins with hyperscalers like Google (TPUs), OpenAI, Meta, and now Anthropic, providing bespoke accelerators that rival Nvidia's dominance in general-purpose GPUs.

• AI networking: Its Ethernet switches (e.g., Tomahawk, Jericho) and co-packaged optics (CPO) enable high-throughput, low-latency AI data centre buildouts. This segment maintains 70–80% margins.

• VMware integration: The $61B acquisition is showing early success. VMware’s VCF saw 19% YoY growth and secured major enterprise deals (e.g., ING, Lloyds) for hybrid cloud deployments.

• Dividend growth: Management raised the quarterly dividend to $0.65/share, payable December 31—marking the 15th consecutive annual increase.

• AI full-stack vendor vision: Broadcom is transitioning from a component supplier to an “AI operating system” provider—spanning chips, interconnects, and orchestration layers.

Although current volatility has disrupted the stock's trajectory, long-term investors remain focused on the scale of Broadcom’s AI opportunity. The company is guiding for AI revenue to double in Q1 2026 and expects continued enterprise adoption of its software stack. If it maintains margin discipline and fulfils its backlog efficiently, the current pullback could mark a consolidation phase before renewed growth.