Broadcom's stock falls despite accelerating AI-chip growth

By Britney Nguyen

The chip maker's latest revenue figures lack meaningful upside after the stock's sharp recent rally

Broadcom's stock was falling following the company's earnings report on Wednesday afternoon.

Shares of Broadcom slid more than 13% in after-hours trading on Wednesday despite a record quarter driven by demand for its artificial-intelligence chips and networking products.

Zacks Investment Research stock strategist Andrew Rocco pinned the decline on "sell the news" action.

"Broadcom is the clear leader in custom application-specific integrated circuits," Rocco said in emailed comments, and that "segment is seeing relentless, accelerating demand."

Broadcom's (AVGO) revenue for AI chips grew 143% to $10.8 billion in the April quarter, and CEO Hock Tan said he expects that figure to reach $16 billion in the current quarter, which would represent growth of more than 200% from the previous year.

The chip maker reported overall revenue of $22.19 billion for the April quarter, up 48% from a year ago, and essentially in line with the $22.13 billion that analysts tracked by FactSet had been expecting. The company reported adjusted earnings of $2.44 per share, topping the consensus for $2.40.

The fiscal second quarter was "driven by accelerating growth in AI semiconductor revenue and strong operating leverage," Tan said in a statement.

For the July quarter, Broadcom is guiding for revenue to increase 84% to $29.4 billion. That guidance came in above the FactSet consensus for $28.3 billion.

Broadcom shares have run up more than 50% over the past three months.

The pull-back on Wednesday afternoon reflecting investors' disappointment in the company's revenue "shows the market demands perfection for this chip rally to keep running," Ryan Lee, senior vice president of product and strategy at Direxion, said.

Despite the sentiment, the hundreds of billions of dollars in hyperscalers' AI spending "is here to stay in the near and medium terms," Lee said in emailed comments.

The custom chip maker "is as well positioned as anyone to capitalize" on the AI buildout, Lee said, adding that Wednesday's decline "does not change this fact and could pose an opportunity."

Zack's Rocco said he would buy the stock under $460. Shares closed Wednesday at around $479, but were recently trading around $418.

Broadcom's semiconductor-solutions business, which also includes non-AI chips and networking, pulled in $15 billion in revenue for the quarter. The infrastructure software segment, which counts VMWare, saw revenue of $7.2 billion.

See more: Alphabet's relentless AI spending is giving new shine to Broadcom's stock

Earlier this week, Broadcom got a boost from Alphabet's (GOOGL) (GOOG) announcement of a sizable equity offering to support its aggressive spending on AI infrastructure.

The two companies have worked together for more than a decade on Google's tensor processing units. While Google doesn't sell its custom chips to third parties, it said in April that it was delivering them to select customers for deployment in their data centers and that it expects to start seeing revenue from this initiative later this year.

Broadcom has been a beneficiary of investors' enthusiasm for custom AI chips, but it also leads the market for chipsets that are essential for scale-up and scale-out networking in AI data centers.

J.P. Morgan analyst Harlan Sur said in a note earlier this week that Broadcom has set "very high barriers to entry" with its Tomahawk line, and that its "aggressive two-year cadence" and ability to double switching throughput performance in each generation of the product "drives our confidence that Broadcom remains one/two steps ahead of competitors."

-Britney Nguyen

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06-03-26 2013ET