Disappointing results from Broadcom
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Breaking with the trend of recent years, a semiconductor company failed to meet expectations in its earnings preview. Broadcom, a leader in the market for custom-designed AI chips, reported quarterly results that were broadly in line with analysts’ estimates, but fell short of the substantial positive surprises typically seen from chipmakers. Although key figures for the next quarter already exceeded expectations, the forecast for AI-related semiconductor sales may still be disappointing to investors, despite the staggering increase. However, the seemingly weaker results reflect heightened expectations rather than a decline in AI demand, and the company’s fundamentals remain strong, so we are maintaining Broadcom on our Equity Top Pick List for now.
Quarterly Report
Broadcom’s stock rose nearly 15% over the past week as investors anticipated a continuation of the strong earnings season from the world’s second-largest chipmaker. However, the results failed to impress investors, causing the stock price to fall 13% after the market closed, thereby erasing the gains from the past week.
The company reported revenue of $22.2 billion for the previous quarter (+48% year-over-year), just exceeding analysts’ estimates of $22.1 billion. Two-thirds of revenue came from semiconductor solutions, while one-third came from infrastructure software sales, which fell slightly short of expectations. Custom-designed AI chips and related network solutions continued to drive growth. The company achieved an outstanding 77% gross margin in the previous quarter, despite the increasing share of lower-margin products (semiconductors) within total revenue—a remarkable achievement. In terms of adjusted earnings per share, the chipmaker reported $2.44, compared to expectations of $2.39 EPS.
In its forecast for the current quarter, the company projects revenue of $29.4 billion, which exceeds the consensus estimate of $28.6 billion and would result in year-over-year revenue growth accelerating to 85%. Thanks to strong demand momentum, AI-related revenue could rise to $16 billion (+200% year-over-year), which, despite the exceptional growth, may disappoint investors who were expecting $17.2 billion. Furthermore, the projected annual revenue of $56 billion for AI chips also falls short of estimates of $57.6 billion, to which the market reacted negatively, and the company’s stock fell nearly 13% following the release of the figures.
In addition, Broadcom must play an increasingly significant role in financing semiconductor acquisitions, particularly for companies such as Anthropic and OpenAI. This is supported by the fact that Broadcom joined as a guarantor for the approximately $36 billion private credit facility provided by Apollo and Blackstone—which supports Anthropic’s TPU purchases. Management also emphasized during the conference call that the Apollo–Blackstone partnership will help not only Anthropic but also OpenAI in meeting the computational demands of artificial intelligence.
Overall, based on the results, the AI story remains strong, but expectations are already very high, so it’s easy to “slip up.” Broadcom has entered into long-term agreements with several major technology companies—Google, Meta, OpenAI, and Anthropic—in recent years, which provide revenue visibility for the coming years; however, based on the latest earnings release, the realization of revenue from these agreements may be somewhat delayed. Nevertheless, the company’s fundamentals remain strong: it is trading at a discount relative to its competitors in terms of valuation, while its growth momentum and profit margins rank among the best in the industry, and all of this is coupled with a strong market position.
Investment Thesis
The wave of AI infrastructure development could also provide Broadcom with a favorable structural tailwind. Within the AI megatrend, as the focus gradually shifts from training to deployment in the coming years, the inference phase will gain importance, and custom-designed AI chips (ASICs) could be the winners, as they can be optimized for specific tasks and are energy-efficient. Broadcom is the market leader in this segment.
The TPUs, co-designed with Google, are competitive with Nvidia GPUs during the inference phase, and as things stand, they outperform GPUs in terms of energy efficiency; thus, in a scenario where energy becomes the bottleneck in AI, the company’s solution could gain value. Furthermore, an Nvidia GPU costs nearly ~3x as much as a TPU, so if hyperscalers find themselves in a tight cash-flow situation, the TPU could be a favorable alternative, as it is not only cheaper to purchase but also cheaper to operate, given that it offers a performance-per-watt ratio that is ~2x as good as that of Nvidia’s previous-generation product.
In the short term, another catalyst could be the 2026 capex plans announced by hyperscalers during Q1—particularly in the case of Google (+50% compared to expectations) and Meta (+15% compared to expectations), which are among the six major customers to whom Broadcom supplies custom-designed AI chips.
Over the past six months, semiconductor companies without their own production lines have significantly underperformed their competitors with production capacity; however, Broadcom announced in early March that it had secured its supply chain for the 2026–2028 period, both in terms of memory and TSMC’s high-end manufacturing capacity. Furthermore, in recent weeks, it has signed long-term agreements with Anthropic, Meta, and Google for ASIC shipments; it reported an agreement with the latter extending through 2031, which could help provide longer-term revenue visibility for the company and mitigate risks related to the sustainability of its growth rate.
Valuation
The company’s profit margin is over 50%, while its EBITDA margin is close to 70%; only Nvidia has comparable figures in the industry. Furthermore, it is one of the top semiconductor companies in terms of growth; analysts expect average annual revenue growth of around 50% and EPS growth of over 65% for the period from 2026 to 2028. Despite this, the stock is trading at a discount of around 20% compared to its competitors. Based on valuation metrics, even a share price of $480 appears fair. The company’s debt burden is not significant; it has a net debt-to-EBITDA ratio of just 1.1, which, combined with strong cash flow generation, can be considered a healthy level.
Risks
One of the key risks associated with Broadcom is potential margin compression, which stems from the rising proportion of AI-related semiconductor product sales in the revenue mix. This exerts downward pressure on the company’s overall gross margin, given that the IT infrastructure business operates with an exceptionally high gross margin of approximately 93%, compared to the roughly 60% level for AI-focused semiconductor products. Although the market has already priced this in, there may be more positive surprises here than in the early March flash report, which indicated no short-term pressure on margins.
In addition, the proportion of sales in China is relatively high (though it is declining year over year) at ~17%, which could pose a geopolitical risk. Furthermore, there is a high concentration of customers in the semiconductor business: nearly all revenue comes from six major players, with Google standing out among them (TPU shipments). In addition, any potential increase in risks surrounding the financing of AI infrastructure investments could, of course, have a negative impact on the company, as well as on the industry as a whole.
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