Broadcom Beat Estimates: So Why Did the Stock Tank?

Global AI ASIC leader $Broadcom(AVGO)$   released its FY2025 Q4 earnings after hours. Although the quarterly results exceeded expectations across the board, the stock price took a sharp dive shortly after the earnings call began. So, what exactly was discussed during the call?

Why Did the Stock Plunge?

The $73 Billion AI Revenue Guidance: Bright, But Not Dazzling Enough

The recent explosive popularity of $Alphabet(GOOG)$  's TPUv7 has once again ignited market enthusiasm for the ASIC sector. As Google's core partner for TPUs, Broadcom stands at the forefront of this trend. The market held very high expectations for Broadcom's AI business next year, with major Wall Street banks significantly raising their FY26 AI revenue forecasts prior to the earnings release.

However, during the call, management revealed that the current backlog for AI related products (XPUs, switches, DSPs, optical components, etc.) stands at over $73 billion, accounting for nearly half of the company's total backlog of $162 billion. This $73 billion is expected to be delivered within the next 18 months.

The breakdown includes:

– XPUs: Approximately $53 billion.

– AI Networking: Approximately $10 billion (with TH6 102T switches seeing record bookings).

– Other businesses: Approximately $10 billion.

Although management stated that this $73 billion can be viewed as the minimum revenue expectation for the AI business over the next six quarters, this figure still pales in comparison to the massive $500 billion revenue guidance indicated by $NVIDIA (NVDA.US)$ at GTCDC.

New Customer is OpenAI, Not Microsoft; Initial Order Only $1 Billion; 10GW Deal Non-Binding

Broadcom received a $10 billion order from Anthropic last quarter (for TPUv7 racks) and secured an additional $11 billion order from the same customer this quarter, with delivery expected by the end of 2026.

The company announced its fifth XPU customer is OpenAI, not $Microsoft (MSFT.US)$ as the market had previously speculated. The initial order is only $1 billion, scheduled for delivery at the end of 2026. Both the Anthropic and OpenAI orders are for rack scale systems, not just XPUs.

What worried the market most was Broadcom's clarification regarding the previously announced 10GW partnership with OpenAI. Management stated that this cooperation, intended for 2027 to 2029, represents a future intent and currently has no binding force.

Gross Margin Expected to Continue Declining, Though Operating Margin to Improve

Gross margin remains a challenging metric for AI chip giants. Broadcom's historical high gross margins relied heavily on its software business, which boasts a 93% gross margin and contributes 40% of revenue.

However, with the software business continuing to soften and lower margin AI business volume surging, management expects the overall corporate gross margin to continue its downward trend. This is particularly true as XPUs are increasingly shipped in the form of lower margin rack systems. Despite this, management emphasized that the operating margin will continue to rise.

FQ4 Key Financial Highlights

~Revenue: $18.02 billion, up 28% YoY and 13% QoQ, beating the market consensus of $17.47 billion.

~GAAP Gross Margin: 68%, up 3.9 percentage points YoY and 0.9 percentage points QoQ, beating the consensus of 67.5%.

~Operating Margin: GAAP: 41.7%, up 8.8 percentage points YoY and 4.8 percentage points QoQ, beating the consensus of 41.5%. Non GAAP: 66.2%, up 3.5 percentage points YoY and 0.7 percentage points QoQ, beating the consensus of 65.3%.

~Net Income: GAAP: $8.52 billion (turning profitable YoY), up 106% QoQ, beating the consensus of $5.48 billion (mainly driven by income tax effects). Non GAAP: $9.71 billion, up 59% YoY and 16% QoQ, beating the consensus of $9.26 billion.

FQ4 Revenue Breakdown by Platform

~Semiconductor Solutions: Revenue of $11.1 billion, up 35% YoY and 21% QoQ, accounting for 61% of total revenue. This segment includes networking, wireless, broadband, storage connectivity, industrial, and XPU chips.

– Segment Profitability: Gross margin was 68%, and operating margin was 59% (up 2.5 percentage points YoY).

– AI vs. Non AI: Within this segment, AI Semiconductor revenue (networking chips, optical comms, XPUs) hit $6.5 billion, up 74% YoY. XPU revenue doubled YoY, with customers expanding usage from internal training/inference to external workloads. Non AI Semiconductor revenue was $4.6 billion, a slight 2% increase YoY, ending a streak of YoY declines. Broadband is recovering and wireless is flat, but enterprise spending remains weak.

~Infrastructure Software: Revenue of $6.9 billion (VMware, Symantec, CA, Brocade), up 19% YoY and 2% QoQ, accounting for 39% of total revenue.

– Segment Profitability: Gross margin was 93% and operating margin was 78%.

FQ1 Guidance

~Total Revenue: Expected to be $19.1 billion, up 28% YoY.

~Margins: Gross margin expected to decline by 1 percentage point QoQ, primarily due to the increased mix of lower margin AI business. Adjusted EBITDA margin is expected to be 67%.

~Segment Forecast:

– Semiconductor Revenue: Expected at $12.3 billion (+50% YoY). Within this, AI revenue is projected at $8.2 billion (doubling YoY), while non AI revenue is expected to remain flat at $4.1 billion.

– Software Revenue: Expected at $6.8 billion (+1% YoY).

Summary

In conclusion, Broadcom's earnings report was undeniably impressive, beating expectations across all key metrics. However, given that the market has assigned Broadcom a valuation far exceeding the industry average, the requirements for success are naturally higher. The guidance of $73 billion in revenue over six quarters may require continuous upward revisions in the future to truly satisfy the market's appetite.

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