Broadcom Is Drowning in AI Orders. Why Aren’t Investors Impressed?

Broadcom (AVGO)‘s stock took a 14.0% haircut before the market even opened on Thursday. You’d think the company had just guided to a collapse. Instead, the CEO was talking about “accelerating growth in AI semiconductor revenue” and demand that is “simply insatiable.” So what exactly is going on here? The market seems to have decided that Broadcom’s AI boom, as spectacular as it is, comes with a catch.

An Unbelievable AI Haul

Let’s be clear: the AI numbers are staggering. The company’s AI semiconductor revenue hit $10.8 billion this quarter alone, a 143% jump from a year ago. And the pipeline is overflowing. Management reported taking in over $30 billion in new AI bookings during the quarter, nearly triple what it actually shipped. The forecast for next quarter is even bigger: $16.0 billion in AI chip sales. Even the legacy non-AI semiconductor business is showing signs of life, with bookings exceeding shipments in what management called a “clear indication we are on the path towards a full cyclical recovery.”

The Price Of Growth

Here’s the rub. All that custom silicon work for the world’s biggest AI players carries a different financial profile. On the earnings call, management confirmed what analysts have been quietly worrying about: the custom chips, or ASICs, that are driving this explosion have “lower margins.” The CFO stated that as these sales “continue to accelerate, there will be pressure overall on margins.” Gross margin already declined by 230 basis points year-over-year to 77.1% as the mix shifts increasingly toward semiconductor products. That wasn’t just talk – the company explicitly guided for its consolidated gross margin to fall further, to “approximately 74%” next quarter.

This isn’t Broadcom’s only margin headwind – Broadcom’s Hidden Risk: VMware Under Pressure?

Upside, With A Caveat

Before writing off the margin compression as pure bad news, consider what’s driving it. When an AI model reaches massive scale, running it on general-purpose GPUs from the likes of Nvidia (NVDA) becomes incredibly expensive. Hyperscalers are co-designing ASICs with Broadcom precisely because they can strip out any component a specific AI model doesn’t need, massively reducing power consumption and cost per query. Training a model happens once – inference runs forever, at enormous volume. Thinner margins on each chip matter a lot less when the order quantities are effectively endless. And once a hyperscaler has co-designed a custom chip with Broadcom, switching costs become prohibitive – the engineering relationship itself becomes a moat.

The question, then, is not whether the AI business is real. It clearly is. The question is whether volume and lock-in can compensate for thinner margins over time. This quarter’s stock reaction suggests investors aren’t yet convinced – and that shifts where the scrutiny needs to land. Forget the headline revenue number for a moment. The figure that will tell the real story next quarter is that consolidated gross margin. Is 74% a stable new floor, or just the next step down? Separately, see Broadcom’s Hidden Risk: VMware Under Pressure?

So, What Should You Do?

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