Key takeaways
- Shares of chip designer Broadcom fell Friday as Wall Street focused on pressure on margins from its fast-growing AI business.
- Investors have scrutinized the tech sector’s profits more closely in recent months amid concerns that Silicon Valley is spending too much on AI.
Broadcom’s custom AI chip business is growing rapidly. Wall Street is, however, wary of the upside potential that this growth suggests.
Broadcom (AVGO) predicted Thursday that its AI revenue would double year over year to $8.2 billion in the current quarter. This would be an acceleration from the most recent quarter, where the amount increased 74% to $6.5 billion. But the forecast came with a caveat, which weighed on shares today. The stock was recently down about 10% in intraday trading.
Broadcom expects gross margin to contract by 100% basis pointsor 1 percentage point quarter-over-quarter, “primarily reflecting a higher AI revenue mix,” CFO Kirsten Spears said on a call with analysts Thursday evening.
Key takeaways
Optimism about artificial intelligence has propelled tech stocks and the broader market to record highs this year. But growing concerns about an AI bubble have made investors more cautious in recent months, putting pressure on the stocks of AI darlings.
The idea that increased AI sales could hurt profitability wasn’t what investors wanted to hear. But investors have recently stepped up their scrutiny of tech profits amid concerns about high stock valuations and unsustainable infrastructure spending, meaning even good news is under the microscope.
This led to unenthusiastic market reactions to company results. NVIDIA (NVDA), leading AI chip supplier and main competitor to Broadcom, exceeded estimates with its figures from last month, but its stock collapsed under the weight of concerns linked to the AI bubble. Software giant Oracle (ORCL) said Wednesday that its backlog now exceeds $500 billion, but it failed to convince investors that its huge investments in AI will soon bear fruit. Its stock collapsed yesterday to lead a liquidation of AI.
Broadcom, meanwhile, is not the only technology company whose profitability is being put under pressure by AI. In October, Oracle projected that its AI cloud infrastructure business would achieve gross margins of between 30% and 40%, about half that of its existing software business.
This year’s AI-driven rally has also set a high bar for tech profits. Heading into Thursday’s results, Broadcom shares were up 75% year to date. The stock is up about 20% in the past month alone thanks to Google’s latest AI modelwhich was trained on chips designed by Broadcom and considered a serious challenger to OpenAI’s ChatGPT.
Bank of America analysts called Wall Street’s concerns about profitability a “legitimate concern” in a note Friday. They lowered their margin estimates for 2026 and 2027 by a few percentage points. Nonetheless, they raised their earnings estimates for those same years, reflecting their belief that faster revenue growth will more than offset shrinking margins. Analysts at Deutsche Bank made the same adjustments and raised their stock price target.