While Broadcom’s latest financial results shattered expectations, a nuanced story is emerging for investors. The semiconductor giant’s booming artificial intelligence business is driving unprecedented revenue, but it is simultaneously applying pressure to a key metric: profitability. This dynamic triggered a significant sell-off in the shares following the earnings report, as the market recalibrated its expectations for growth versus margins.
Financial Performance Exceeds Forecasts
For its fiscal fourth quarter ended December 11, 2025, Broadcom posted figures that comfortably surpassed Wall Street’s estimates. The company reported revenue of $18.02 billion, a 28% year-over-year increase and above the $17.49 billion analysts had anticipated. Adjusted earnings per share came in at $1.95, a 37% jump from the prior year and beating the $1.86 consensus forecast.
The annual results further underscore the company’s momentum. Full-year revenue reached $63.9 billion, supported by an adjusted EBITDA of $43.0 billion, representing a 35% annual gain. Free cash flow for the year was a robust $26.9 billion.
CEO Hock Tan attributed the record performance directly to AI, stating that the quarter was “primarily driven by a 74% year-over-year increase in AI semiconductor revenue.”
Strong Guidance Contrasted with Margin Compression
Management issued an optimistic outlook for the first quarter of fiscal 2026, projecting revenue of approximately $19.1 billion. This forecast notably exceeds the analyst consensus of $18.31 billion. Within that total, AI semiconductor revenue is expected to hit $8.2 billion, doubling from the year-ago period. The company also anticipates an adjusted EBITDA margin of 67% on the projected revenue.
However, the guidance contained a critical caveat that captured investor attention. CFO Kirsten Spears indicated that the gross margin for Q1 is projected to decline by approximately 100 basis points sequentially. She explained that this contraction is due to the changing product mix, with AI-related sales representing a larger portion of the business.
“The AI segment is a high-growth but lower-margin business compared to our established semiconductor and software portfolios,” the implication from management commentary suggests. Spears elaborated that as Broadcom delivers more complete systems, “we pass through more cost in the rack, so those gross margins will be lower.”
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Furthermore, CEO Tan tempered near-term expectations regarding the company’s high-profile partnership with OpenAI, announced in October 2025. He clarified that significant revenue from this collaboration is not expected until 2027, 2028, and 2029, with 2026 contributing “not much.” This statement deliberately cooled any short-term speculative excitement.
Expanding AI Client Roster and Backlog
Broadcom provided new details on its AI customer base, revealing that the entity previously referred to only as a “major AI customer” is Anthropic. The AI firm placed a $10 billion order in the quarter. In total, Broadcom now has $21 billion in orders from Anthropic scheduled for delivery in the second half of 2026.
The company also increased its number of major clients for custom AI chips from three to five. Most significantly, Broadcom disclosed an AI-related order backlog of $73 billion for delivery over the next 18 months. This immense backlog ensures high utilization and continued revenue growth but also reinforces the ongoing margin pressure.
Market Reaction: Profit-Taking After a Rally
The market’s response to the report was decisively negative, despite the record numbers and full order book. Following a strong run-up in the stock price this year, investors seized on the signals of gross margin compression and the delayed monetization of the OpenAI deal to take profits.
In recent trading, Broadcom shares closed at €290.60. This price sits approximately 18% below the 52-week high reached on December 10, though it remains in positive territory over a twelve-month horizon. The current pullback appears to be a reassessment of the trade-off between explosive growth and near-term profitability.
The Strategic Trade-Off
The operational path forward is clearly defined. Broadcom is positioned for a powerful revenue surge from AI, but this growth is accompanied by an acceptance of lower gross margins in the near term. While the market is reacting sensitively to this shift in the business profile in the short run, the medium- to long-term narrative will depend on Broadcom’s ability to gradually improve the profitability of its AI operations and convert its substantial backlog into sustainably high cash flows.
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