Is Broadcom Stock Heading for a Fall?
Broadcom (AVGO) has stumbled before. Its stock has plunged more than 30% within a span of less than 2 months on 2 occasions in recent years, wiping out billions in market value, and erasing massive gains in a single correction. If history is any guide, AVGO stock isn’t immune to sudden, sharp declines.
Specifically, we see these risks:
- VMware Customer Exodus and Margin Erosion
- Custom Silicon Customer Concentration
- AI-Driven Margin Dilution
Risk 1: VMware Customer Exodus and Margin Erosion
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- Details: Significant recurring revenue loss from software segment., Multiple contraction due to slowing growth and margin pressure.,
- Segment Affected: Infrastructure Software
- Potential Timeline: Immediate to Q4 2026
- Evidence: Price hikes of 800% to 1,500% for some European customers., Competitors like Nutanix and Scale Computing reporting surging demand from fleeing VMware users.,
Risk 2: Custom Silicon Customer Concentration
- Details: Loss of a key hyperscaler customer (e.g., Google) could erase billions in high-growth AI revenue., Valuation de-rate as AI growth narrative falters.,
- Segment Affected: Semiconductor Solutions (AI ASICs)
- Potential Timeline: Next 12-24 months
- Evidence: Top five end customers account for roughly 35% of net revenue., Reports of Google mulling a switch to competitor Marvell Technology for custom AI chips by 2027 due to Broadcom’s price hikes.,
Risk 3: AI-Driven Margin Dilution
- Details: EPS miss due to lower-than-expected gross margins., Negative sentiment shift as high-margin narrative breaks down.,
- Segment Affected: Semiconductor Solutions
- Potential Timeline: Q1 2026 Onwards
- Evidence: Company guidance for a 100 basis point sequential decline in gross margins., Shift in revenue mix to lower-margin AI ‘system’ sales, combining Broadcom chips with third-party components.,
What Is The Worst That Could Happen?
Looking at AVGO, it’s clear risk is real despite positives. The stock fell about 27% in 2018’s correction, nearly 48% during the Covid crash, and around 35% in the recent inflation shock. Even strong stocks like AVGO can face steep drops in tough markets.
But the Stocks fall even when markets are good – think events like earnings, business updates, and outlook changes. Read AVGO Dip Buyer Analyses to see how the stock has recovered from sharp dips in the past.
Is Risk Showing Up In Financials Yet?
- Revenue Growth: 23.9% LTM and 25.2% last 3-year average.
- Cash Generation: Nearly 42.1% free cash flow margin and 40.8% operating margin LTM.
- Valuation: Broadcom stock trades at a P/E multiple of 71.6
| AVGO | S&P Median | |
|---|---|---|
| Sector | Information Technology | – |
| Industry | Semiconductors | – |
| PE Ratio | 71.6 | 23.5 |
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| LTM* Revenue Growth | 23.9% | 6.1% |
| 3Y Average Annual Revenue Growth | 25.2% | 5.5% |
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| LTM* Operating Margin | 40.8% | 18.8% |
| 3Y Average Operating Margin | 38.6% | 18.4% |
| LTM* Free Cash Flow Margin | 42.1% | 13.5% |
*LTM: Last Twelve Months
If you want more details, read Buy or Sell AVGO Stock.
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