On Friday, Broadcom (AVGO.US) became the focus of Wall Street. The tech giant, spanning software and semiconductors, received high praise from multiple investment banks after releasing its latest earnings report and guidance. However, despite an initial post-earnings rally, the stock later gave up gains as some investors expressed concerns over potential margin pressures. At the time of writing, shares were down over 10% at $365.
Morgan Stanley analyst Joseph Moore noted in a client report that Broadcom delivered an "exceptionally strong" performance this quarter, marking the first time in a while that the company has shown short-term upside potential. He highlighted that each quarter in calendar 2025 has raised long-term expectations, with the number of key customers expanding from three to five. Additionally, Broadcom provided an optimistic target for its 2027 serviceable addressable market (SAM).
Driven by positive developments in TPU v7, Broadcom's AI-related revenue continues to exceed expectations, though this strength is partially offset by weakness in non-AI semiconductor segments. Moore also pointed out that this quarter’s results reflect a clearer short-term inflection point, with both revenue and EPS guidance significantly surpassing prior estimates. Notably, AI revenue guidance for the January quarter was about 20% higher than expected.
Given these factors, Morgan Stanley maintained an "Overweight" rating on Broadcom and raised its target price from $443 to $462. However, Moore expressed caution on certain details. He noted that Anthropic, a major customer, placed an order worth approximately $10 billion, with an additional $11 billion in follow-up orders. These products are based on Google’s TPU architecture, and management indicated that Anthropic-related sales may require profit-sharing with Google. More importantly, the full-system-rack sales model could significantly compress Broadcom’s gross margins.
Moore stated that management acknowledged this business would have lower-than-average margins but did not provide specific figures due to uncertainty. Morgan Stanley tentatively assumes mid-40% gross margins, though actual results could vary. He also warned that these orders generate less unit revenue per shipment compared to accelerator card sales to other cloud customers, increasing earnings volatility. Furthermore, the sustainability of this business by 2027 remains unclear, particularly regarding whether Anthropic will continue placing orders.
Management disclosed an AI backlog of about $73 billion deliverable over the next 18 months, suggesting potential revenue declines in the first half of 2027. However, Moore believes new orders could still support growth during this period. Still, with AI revenue already exceeding $90 billion over the next 18 months, sequential growth in early 2027 may be limited, and Broadcom’s outlook for 2027 appears slightly more conservative than in previous earnings calls.
Jefferies analyst Blayne Curtis also raised Broadcom’s target price post-earnings, citing the continued expansion of its AI narrative. He noted that Anthropic added another $11 billion in orders for Q4 FY2026, while external TPU-related business progressed. Additionally, Broadcom secured a fifth unnamed customer for a multi-year custom XPU project, which may not involve OpenAI and could be linked to Apple. The company’s AI backlog for the next six quarters stands at roughly $73 billion.
Curtis acknowledged investor concerns that this figure may not fully capture upside potential for FY2026 but expects new orders in the second half. He observed a shift in Broadcom’s communication strategy—previously emphasizing long-term prospects during strong short-term performance, but now focusing more on near-term quarters as AI business accelerates.
Wells Fargo analyst Aaron Rakers echoed the sentiment, stating Broadcom’s AI momentum is "accelerating," particularly highlighting backlog growth in FY2027 guidance. Wells Fargo subsequently raised its target price from $345 to $410.
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