MEXICO CITY (Dec 11): Broadcom projected first-quarter revenue above Wall Street estimates on Thursday, but indicated that margins would decline due to a greater mix of AI revenue, leading to a 5% drop in shares during extended trading hours.
As the company ventures deeper into the AI chip market, investor concerns have arisen regarding the profitability and costs associated with significant investments. Broadcom currently holds a backlog of US$73 billion that it expects to ship over the next 18 months, according to CEO Hock Tan during a post-earnings call. Nonetheless, CFO Kirsten Spears cautioned that profit margins could diminish.
“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. She noted that margins would continue to be impacted throughout the year by the revenue mix from infrastructure, software, and semiconductors.
The concentration of Broadcom’s AI customers, along with anticipated lower margins for AI system sales, contributed to the decline in shares, according to Kinngai Chan, a senior research analyst at Summit Insights. “The backlog is still coming from only five customers and includes systems, which have a higher price tag. System sales will carry lower gross margin and … are expected to become a larger part of total sales in the future quarters, namely the second half of fiscal 2026,” Chan explained.
Analyst Gil Luria from D.A. Davidson raised concerns that declining gross margins may highlight the challenges posed by costs associated with contract chip manufacturer TSMC, potentially squeezing the value Broadcom can achieve from its custom AI processors business.
Broadcom collaborates with major hyperscale cloud providers such as Google and Meta Platforms to design and manufacture processors known as ASICs, which serve as a significant alternative to Nvidia’s graphics processing units. This strategic positioning is crucial as US cloud providers are projected to spend over US$400 billion on AI-related infrastructure this year to support services like ChatGPT, Copilot, and Gemini.
However, the escalating expenditures, coupled with limited evidence of tangible AI productivity gains, inflated valuations, and a complex web of circular investments, have led to growing fears of an AI bubble.
In his statement, Tan asserted that Broadcom’s AI semiconductor revenue, which includes both custom chips and networking chips used in AI data centers, is expected to double to US$8.2 billion in the fiscal first quarter. This forecast reinforces the company’s aggressive push into the AI sector despite potential profitability concerns.
Broadcom anticipates quarterly revenue of approximately US$19.1 billion, surpassing analysts’ average estimate of US$18.27 billion, as per data compiled by LSEG. The company had previously reported revenue of US$18.02 billion for the fourth quarter ended November 2, exceeding estimates of US$17.49 billion.
As Broadcom continues to navigate the complexities of the AI chip market and manage investor expectations, the company’s future performance will hinge on its ability to balance growth with profitability in an increasingly competitive landscape.
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