Broadcom projected first-quarter revenue that exceeded Wall Street estimates on Thursday, but warned that profit margins would decline due to a greater emphasis on AI-related sales. The company’s shares fell 5% during extended trading as investors reacted to these developments.
As Broadcom dives into the competitive AI chip market, concerns have arisen regarding the profitability and substantial investments required. CEO Hock Tan reported a significant backlog of $73 billion anticipated to be shipped over the next 18 months, but CFO Kirsten Spears cautioned that gross margins are likely to decrease. “We expect first-quarter consolidated gross margin to be down approximately 100 basis points sequentially, primarily reflecting a higher mix of AI revenue,” Spears stated during the post-earnings call.
The decline in margins is expected to persist throughout the year, influenced by the revenue mix of infrastructure, software, and semiconductors. Analysts noted that Broadcom’s concentrated focus on AI customers, combined with the anticipated lower margins from AI system sales, fueled the stock drop. Kinngai Chan, a senior research analyst at Summit Insights, highlighted that the backlog largely stems from only five clients and includes systems with higher price tags, which are projected to carry lower gross margins. These system sales are expected to constitute a larger portion of total sales in upcoming quarters, particularly in the second half of fiscal 2026.
The pressure on gross margins may be exacerbated by costs associated with contract chip manufacturer TSMC, raising concerns about the profitability of Broadcom’s custom AI processors. Gil Luria, an analyst at D.A. Davidson, expressed that such costs could limit the value Broadcom can achieve from its AI semiconductor business.
Broadcom collaborates with major cloud providers, including Google and Meta Platforms, to design and manufacture application-specific integrated circuits (ASICs), which serve as alternatives to Nvidia’s graphics processing units. With U.S. cloud providers expected to spend over $400 billion on AI this year to enhance data centers for services like ChatGPT, Copilot, and Gemini, the market is experiencing significant investment and interest.
However, the mounting spending on AI, combined with limited evidence of tangible productivity improvements, high valuations, and a complex network of investments, has raised fears of an AI bubble. Despite these concerns, Broadcom’s AI semiconductor revenue, which encompasses both custom chips and networking chips utilized in AI data centers, is projected to double to $8.2 billion in the fiscal first quarter.
For the first quarter, Broadcom forecasts quarterly revenue of approximately $19.1 billion, surpassing analysts’ average estimate of $18.27 billion, as compiled by LSEG. This projection follows the company reporting revenue of $18.02 billion for the fourth quarter ending November 2, exceeding estimates of $17.49 billion.
As Broadcom navigates the complexities of the AI landscape, the interplay between growth opportunities and margin pressures will be crucial for its performance in the coming months. The company’s strategic investments in the AI sector underscore its commitment to maintaining a competitive edge, even as uncertainties loom over profitability.
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