The TPU Mix Is Thinning Broadcom’s Gross Margin, Not Its Profit

The mix shift toward custom AI silicon is pulling Broadcom’s gross margin lower while its operating margin has gone the other way, and that gap is the case for the stock.

Broadcom (AVGO) trades at $368.79, well below its 52-week high of $480.81, after slipping 17.3% over the past three months and still holding a 23.7% gain over the past twelve. The worry that shadows the stock comes from the company itself: the custom AI silicon driving its growth carries thinner margins than the rest of what it sells. Gross margin is not the number that answers that worry.

Fiscal Q2 2026 Already Ran Broadcom’s Margin Experiment

In fiscal Q2 2026 gross margin slipped 32 basis points year over year to 77.1% on management’s non-GAAP basis, as semiconductors took a larger share of the mix. The thinning does not stop there: management has guided consolidated gross margin down to roughly 74% for fiscal Q3 2026. The operating line went the other way in fiscal Q2 2026: operating margin increased 200 basis points year over year to a record, and management has guided it flat quarter over quarter at roughly 67% for fiscal Q3 2026.

Why A Thinner-Margin TPU Still Lands More Profit

The custom accelerators pulling that gross margin down sit inside Broadcom’s fastest-growing business: AI semiconductor revenue reached $10.8 billion in fiscal Q2 2026, up 143% year over year, against $22.2 billion of total revenue. Management puts its ASICs and TPUs among the lower-margin chips it makes. What the mix gives up above the gross line, scale takes back below it, and the CFO attributed the 200-basis-point operating margin gain to operating expenses staying relatively flat.

Those expenses ran $2.2 billion in fiscal Q2 2026, just under a tenth of revenue, and $1.6 billion of that was R&D, the pool that funds the TPUs, the MTIA parts for Meta and the AI networking silicon that clusters them. The semiconductor segment’s own operating margin reached 62%, up 460 basis points year over year. Margin strength of that kind is typical of the businesses that make up the Trefis High Quality Portfolio.

What Fiscal Q3 Settles When Broadcom Reports In September

The case is not that the risk is gone. The AI business runs through six core customers, and management expects one of them to use more than one source for its AI compute; the exposure there is to revenue rather than to margin. Nor is the stock cheap, at about 23 times trailing sales against a ten-year range topping out near 26. What early September settles is narrow: both lines are already guided – gross margin down to roughly 74%, the operating line flat at roughly 67% – so the live question is only whether the operating line holds where management said it would.

As for how much movement the market expects around that report, not much: implied volatility sits at 41, in the 13th percentile of its own trailing year, and the option implied volatility screen puts that reading against the rest of the market.

A Margin Structure This Durable Still Belongs To One Company

Operating leverage of this kind can keep working exactly as it has and the stock can still turn on a decision taken inside a customer’s boardroom, which is the part no single holding diversifies away. The Trefis High Quality Portfolio treats compounding as a rules-based system spread across a set of businesses rather than a bet on any one of them. That portfolio has a track record of outpacing the three major indices – the S&P 500, S&P Mid-cap, and Russell 2000.