Despite posting record-breaking quarterly figures and showcasing explosive growth in its artificial intelligence division, Broadcom Inc. saw its stock price plunge by double digits. The market’s reaction highlights a growing tension between robust revenue expansion and mounting fears over future profitability, shifting focus from current earnings to the cost of funding AI-driven growth.
A Stark Market Reaction
In a sharp reversal on Friday, Broadcom’s equity dropped approximately 11.7%, closing at €305.80. This single-session decline erased a significant portion of the stock’s recent gains, even though it remains up for the year to date.
The sell-off appears paradoxical against the company’s operational performance, which exceeded Wall Street’s forecasts. Broadcom reported revenue of $18.02 billion, soundly beating consensus estimates of around $17.45 billion. Adjusted earnings per share came in at $1.95, also above the anticipated $1.87. In a further show of confidence, the board raised the dividend for fiscal 2026 by 10% to $0.65 per share.
Yet, investor attention was captured by a different metric: margin guidance.
The AI Boom’s Double-Edged Sword
The catalyst for the decline was a cautionary note from management regarding future gross margins. During the earnings call, Chief Financial Officer Kirsten Spears indicated that the consolidated gross margin for the first quarter is projected to contract by roughly 100 basis points compared to the prior quarter.
Ironically, this pressure stems from the very AI business hailed as the company’s primary growth engine:
- Changing Revenue Composition: The contribution of AI-related segments to total revenue is accelerating rapidly.
- Lower-Margin Products: Specially designed AI chips (ASICs) typically generate lower gross margins than Broadcom’s legacy products, such as standard semiconductors or software.
- Structural Shift Anxiety: Investors are concerned that aggressive expansion into AI infrastructure may weigh on profitability, at least in the near term, even as top-line growth continues unabated.
For a market that has recently valued semiconductor stocks heavily on high margins and earnings quality, this guidance carried substantial weight, explaining the severe reaction.
Should investors sell immediately? Or is it worth buying Broadcom?
Unabated Demand and a Robust Backlog
From an operational standpoint, Broadcom’s momentum remains formidable. AI solution revenue surged 74% year-over-year. CEO Hock Tan pointed to a massive $73 billion backlog, providing the company with high visibility for the next 18 months.
Furthermore, the company disclosed an $11 billion AI chip order from startup Anthropic for the second half of 2026. The outlook for the first quarter of 2026 was also raised aggressively, with Broadcom forecasting revenue of $19.1 billion, well above previous market expectations of $18.3 billion.
The overarching narrative is clear: demand for Broadcom’s technology, especially in AI, remains exceptionally strong. The current debate is not about growth potential but the profitability of that growth.
Wall Street’s Dilemma: Growth Narrative vs. Margin Compression
Analysts are now intensely debating whether the stock drop signals a fundamental re-rating or an overreaction to short-term margin pressure. Some market experts contend that investors are placing excessive focus on slight margin compression while underestimating the long-term growth trajectory.
Key points under scrutiny include:
- Customer Concentration: Broadcom’s significant reliance on a handful of large cloud providers, such as Google and Meta, is perceived as a risk factor.
- Long-Term Value: The substantial order backlog supports the thesis that demand for AI data center infrastructure is experiencing structural, long-term growth.
- Market Sentiment: Following a powerful rally in the chip sector, investors have become highly sensitive to any hint of declining profitability.
In the short term, the stock is navigating an environment of elevated expectations and minimal tolerance for disappointing guidance.
Conclusion: Growth Prevails, But at a Cost
Broadcom is in a transitional phase where the rapid scaling of its AI business is colliding directly with margin concerns. The double-digit share price decline primarily reflects market apprehension that the price for AI growth will be paid upfront through lower gross margins. However, the $73 billion backlog and upgraded revenue forecast reinforce the argument that the long-term growth story remains intact—it is simply progressing under terms that the market is now recalibrating to price.
Ad
Broadcom Stock: Buy or Sell?! New Broadcom Analysis from December 13 delivers the answer:
The latest Broadcom figures speak for themselves: Urgent action needed for Broadcom investors. Is it worth buying or should you sell? Find out what to do now in the current free analysis from December 13.
Broadcom: Buy or sell? Read more here...
