Broadcom Punished

Broadcom just posted a clean earnings beat, but the stock still sold off hard.

Reminder that Broadcom is one of few companies with >$1T market cap

Shares dropped ~8–10% as investors zeroed in on one thing: AI chips carry lower gross margins than Broadcom’s legacy businesses.

That’s the headline. The substance tells a slightly different story...

Broadcom’s AI business is now the primary growth engine, with management guiding to AI semiconductor revenue doubling YoY to $8.2B this quarter.

That growth comes with a tradeoff: a richer mix of AI revenue pushes consolidated gross margins down by ~100 basis points.

Yes, margins compress.... But earnings accelerate.

That’s the key distinction the market is struggling with.

Even analysts focused on margin pressure still see upside.

Estimates suggest gross margins could fall from ~78.6% to ~74% by fiscal 2026... but price targets are moving higher, not lower.

Why? Because AI volume more than offsets the margin hit.

And the demand picture is hard to ignore:

$73B AI order backlog, expected to ship over the next 18 months
$21B+ in orders from Anthropic alone for late 2026 delivery
A new fifth AI customer with a $1B order
AI chips co-developed with Google, embedded deep in hyperscaler infrastructure

This isn’t speculative demand. These are contracted, named customers writing massive checks.

The real reason for the pullback? Expectations!!!

Broadcom was up ~75% this year.

At 40x+ earnings, the stock wasn’t priced for anything short of perfection. Any hint of margin dilution or slower non-AI growth was enough to trigger a reset.

But step back:

Revenue beat expectations
EPS beat expectations
Forward guidance beat expectations
Dividend raised 10%

That’s not deterioration—that’s execution.

AI is changing Broadcom’s mix, not its trajectory. Lower margins on vastly higher revenue can still mean significantly higher absolute profits, which is what ultimately compounds shareholder value.

Volatility here is about valuation digestion, not a broken thesis.

For long-term investors, this looks less like a warning sign, and more like a pause in a structurally strong AI-driven growth story...

I'd love to see more research on Broadcom. I don't know too much about them.