Broadcom’s AI Paradox: Record Revenue Meets Margin Concerns

A surge in demand for artificial intelligence hardware propelled Broadcom to record quarterly results, yet its shares experienced a significant sell-off. The market's reaction highlights a growing investor dilemma: can explosive growth in AI be sustained if each new dollar of revenue comes at the cost of profitability?

Broadcom concluded its fiscal 2025 fourth quarter with financial performance that, on the surface, exceeded expectations. Revenue climbed 28% year-over-year to $18.02 billion, while adjusted earnings per share jumped 37% to $1.95. The primary engine for this growth was unmistakably the company's AI segment, where semiconductor revenue skyrocketed 74% to $6.4 billion.

CEO Hock Tan provided an ambitious outlook, forecasting that AI revenue would reach approximately $8.2 billion in the first quarter of fiscal 2026—nearly double the year-ago period. The company's total revenue target for the coming quarter is around $19.1 billion, well ahead of consensus estimates. Operational strength was further evidenced by a free cash flow generation of $7.47 billion, representing about 41% of revenue, and a 10% increase in the quarterly dividend to $0.65 per share.

The Gross Margin Trade-Off Emerges

Despite these robust figures, Broadcom's stock fell sharply, declining roughly 12% on the report day and about 9% for the week. Shares now trade at €305.80, approximately 13% below their recent 52-week high, though they remain up by about one-third since the start of the year.

The catalyst for the decline was not the earnings themselves but forward-looking commentary on profitability. CFO Kirsten Spears indicated the gross margin for the current quarter is expected to contract sequentially by about 100 basis points to around 76.9%. This compares to 77.9% in the prior quarter and 79% in the year-ago period.

This pressure stems from an evolving sales mix within the AI business. Broadcom is increasingly selling complete server racks to large customers, rather than only individual chips. This system-level approach requires the procurement of additional components, which carries a lower margin profile. The growing business with clients like Anthropic is accelerating this shift away from high-margin discrete chips toward lower-margin integrated solutions.

Order Backlog and Key Customer Details

During the earnings call, Broadcom provided new clarity on its customer base, identifying AI company Anthropic as a previously unnamed major client responsible for a substantial portion of AI orders. Over the past two quarters, Anthropic has placed orders worth $21 billion for Google's custom Ironwood chips. An additional $11 billion order is scheduled for delivery by the end of 2026.

The company also announced a fifth hyperscale customer has placed a $1 billion order for server capacity for late 2026. Its previously disclosed partnership with OpenAI is proceeding on schedule but is not expected to contribute meaningfully to revenue until 2027.

Should investors sell immediately? Or is it worth buying Broadcom?

This influx of orders has swelled Broadcom's total backlog to $73 billion in booked but not yet realized sales, providing high visibility for the next approximately 18 months. However, this also intensifies the challenge of managing margins as the proportion of system-level sales grows.

Analysts Attribute Sell-Off to Profit-Taking

Market analysts largely maintained a constructive view of the stock despite the downturn. Many interpreted the share price reaction as a pronounced bout of profit-taking following an exceptional rally; prior to the report, the stock had gained about 75% year-to-date in U.S. dollar terms.

Bernstein analyst Stacy Rasgon framed the decline within a broader market context, citing general "AI anxiety" rather than fundamental issues at Broadcom. Mizuho Securities responded by raising its price target from $435 to $450, with analyst Vijay Rakesh characterizing the period of weakness as a buying opportunity. HSBC maintains one of the most bullish stances with a $535 price target, implying significant potential upside.

The pressure was not isolated to Broadcom. Other AI-related stocks also faced selling: Oracle shares fell about 4.5% following its own disappointing results, Nvidia declined over 3%, and infrastructure player CoreWeave dropped 10%, having lost more than half its market value since its June peak.

Strategic Strength Amid Scrutiny

Broadcom remains strategically positioned at the core of the AI infrastructure boom. It is a leading provider of custom AI accelerators (ASICs) and high-speed networking chips, and it dominates the market for switches in cloud data centers. Its deep integration with hyperscalers like Google and Meta further solidifies this standing.

Concurrently, skepticism is mounting over the enormous capital being deployed into AI infrastructure. Investors are increasingly scrutinizing when and how these multibillion-dollar investments will translate into profitable business for end customers. This heightened examination is now affecting suppliers like Broadcom, especially when high growth rates are paired with modest margin compression.

The overall picture is clear: Broadcom is demonstrating formidable operational growth, boasts a substantial order backlog, and holds a solid position in the AI ecosystem. However, the market has shown it is prepared to take profits quickly on any signs of margin erosion. The critical test in the coming quarters will be the company's ability to pair its remarkable AI growth with stable, even if slightly diminished, profitability.