Broadcom’s Stock Plunge: A Contradiction in Strong Earnings

Investors were presented with a textbook set of positive results from Broadcom: a significant revenue surge, profits exceeding forecasts, and an upgraded outlook. Yet, in a paradoxical move, the company's shares faced a severe sell-off on Friday, plummeting by double digits. This reaction underscores a specific metric that has introduced unease on Wall Street, even as the AI business thrives and order books swell. The central question is whether the market's response is an overreaction or a justified correction.

From a fundamental perspective, Broadcom's growth narrative remains robust. CEO Hock Tan revealed a staggering $73 billion backlog specifically for AI products, providing the company with substantial visibility for the next year and a half. AI-related revenue is projected to double year-over-year to $8.2 billion. Many market observers point to this as the core bullish argument, suggesting that the sheer volume growth will more than offset any percentage decline in profitability when measured in absolute dollar terms. Following the decline, analysts from firms including Morgan Stanley and Cantor Fitzgerald reaffirmed their buy ratings, citing price targets well above the current trading level.

Stellar Performance Meets a Stark Sell-Off

The semiconductor giant's fourth-quarter figures were, by most measures, exceptional. Revenue climbed 28% to $18.02 billion, clearly surpassing expectations. Earnings per share also beat analyst estimates. The forward guidance was even more impressive, with management projecting current first-quarter revenue of approximately $19.1 billion, notably higher than the consensus forecast of $18.3 billion. In a further display of confidence, the corporation raised its dividend by 10%. Against this backdrop, the stock's 11.70% drop to €305.80 on Friday appears counterintuitive.

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

The Margin Dilemma Behind the Decline

The catalyst for the sharp decline was rooted in profitability guidance. Company executives indicated that the gross margin is expected to contract by roughly 100 basis points in the upcoming quarter. Ironically, this pressure stems directly from Broadcom's runaway success in the artificial intelligence sector. The company is selling increasing volumes of custom AI accelerators (XPUs) to hyperscalers. However, these hardware sales carry lower margins compared to the firm's entrenched and highly profitable software business. Consequently, the shifting revenue mix is diluting overall percentage profitability. In a market environment where AI stocks are priced for absolute perfection, this single point of concern was sufficient to trigger a wave of profit-taking.

Conclusion and Market Outlook

The market is now digesting the reality that Broadcom's accelerated growth trajectory is temporarily coming at the expense of its margin profile. For the new trading week, a key focus will be whether the shares can establish a technical base following their slide to €305.80. The long-term outlook hinges on the company's ability to efficiently execute on its $73 billion order backlog without further eroding profitability. Given the underlying fundamental strength, many experts are characterizing the recent pullback more as a market overreaction than the beginning of a sustained downtrend.