Broadcom (AVGO) shares fell 12.6% on June 4 after the chipmaker delivered quarterly results that largely matched Wall Street expectations but failed to provide the AI revenue boost some investors were hoping for.
The company reported fiscal second-quarter adjusted earnings of $2.44 a share on revenue of $22.19 billion. Analysts had expected earnings of $2.40 a share and revenue of $22.27 billion, CNBC reported.
Revenue increased 48% from $15 billion a year earlier, while net income jumped 88% to $9.31 billion, or $1.91 a share, from $4.97 billion, or $1.03 a share, in the same quarter last year.
For the current quarter, Broadcom forecast revenue of about $29.4 billion, ahead of Wall Street estimates of $28.53 billion.
Despite the strong growth, investors appeared disappointed that Broadcom did not raise its forecast for more than $100 billion in AI semiconductor revenue by fiscal 2027, Investopedia noted.
The stock remains up about 21% this year, outperforming the Nasdaq Composite’s 15.4% gain. Shares have surged roughly sevenfold since the end of 2022 as demand for artificial intelligence infrastructure accelerated following the launch of ChatGPT.
Custom AI chips are becoming a bigger business for Broadcom
Broadcom is one of the biggest beneficiaries of the AI boom, though its business differs from rivals such as Nvidia (NVDA) and Advanced Micro Devices (AMD).
While Nvidia primarily sells graphics processing units, or GPUs, that power AI training and inference, Broadcom helps customers design custom AI accelerators tailored to their specific workloads.
Chief Executive Hock Tan said in the earnings call that AI revenue more than doubled from a year ago to $10.8 billion during the quarter. The company expects AI revenue to reach $16 billion in the current quarter.
Tan said Broadcom’s six major AI customers include Anthropic, Alphabet (GOOGL), Meta Platforms (META), and OpenAI. Last year, Tan disclosed that Anthropic had placed an order worth roughly $10 billion for AI chips, CNBC reported.
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The company continues to see what Tan described as “insatiable” demand for AI infrastructure. Bookings exceeded $30 billion during the quarter, compared with roughly $11 billion of AI products shipped.
Still, Broadcom reiterated rather than raised its AI forecast.
“We expect this momentum to continue into fiscal year 2027 and reiterate our AI semiconductor revenue guidance to be in excess of $100 billion,” Tan said during the earnings call.
Tan also revealed that Broadcom plans to focus on supplying “only chips,” rather than complete AI systems, as Broadcom had previously said it would be providing to its customers.
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Citi sees selloff as a buying opportunity
Analysts at Citi said the earnings report was largely in line with expectations, though AI revenue guidance for the July quarter came in slightly below Wall Street forecasts.
Citi maintained its buy rating and $500 price target on the stock. “We view the share price pullback as an enhanced buying opportunity,” the analysts wrote in a research note shared with TheStreet.
Related: 5-star analyst revamps Broadcom stock price target after earnings
Broadcom expects gross margin to decline to about 74% in the current quarter from roughly 77% previously as AI chips account for a larger share of sales. AI revenue is expected to increase from about 30% of total revenue in the April quarter to roughly 38% in the July quarter.
Citi said the lower margin outlook reflects a growing mix of custom AI chips, which typically carry lower gross margins than Broadcom’s networking products and software businesses.
“Lower gross margins due to higher AI sales mix are offset by stable operating margins,” the analysts said.
While Citi remains bullish on Broadcom, the firm noted that investors should keep an eye on one key customer.
“We estimate it derives ~35-40% of sales from its largest customer, Google. Therefore, any major uptick/downtick in demand for Google’s products could result in upside/downside to our estimates and rating for Broadcom,” the analysts wrote.
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