Broadcom (AVGO) Stock Tumbles 5% Despite Explosive AI Revenue Growth

Key Takeaways

• AVGO shares declined over 5% after hours even as AI-related revenue skyrocketed 221% year over year to reach $16.7 billion
• The company delivered third-quarter revenue of $29.59 billion, up 86% annually and above estimates, with adjusted earnings per share of $3.32 versus the $3.23 forecast
• Fourth-quarter revenue projection of $34.8 billion missed the Street’s $35.03 billion target
• The chipmaker increased its fiscal 2027 AI revenue forecast to approximately $115 billion from $100 billion, yet some market participants anticipated $150 billion or higher
• Competitive pressures in the custom chip space are intensifying, with reports suggesting Google is broadening its partnership with competitor Marvell

Broadcom delivered quarterly results that would typically spark celebration. Instead, shares tumbled.

AVGO slid more than 5% during after-hours trading Wednesday following the semiconductor company’s fiscal third-quarter earnings release. Shares changed hands around $361.74 in extended sessions, down from the regular session close of $367.24.

Broadcom Inc., AVGO

The company’s AI chip revenue climbed to $16.7 billion, representing a 221% increase from the prior year and a 54% jump sequentially. Overall revenue expanded 86% year over year to $29.59 billion, surpassing Wall Street’s $29.45 billion projection. Adjusted profit per share reached $3.32, exceeding the consensus estimate of $3.23.

On paper, these metrics would qualify as exceptional performance. However, market expectations had climbed even higher.

StoneX analyst Cody Acree, maintaining a Buy recommendation on AVGO, explained the situation clearly: the earnings beat simply “not enough to keep investors happy.” He referenced the benchmark Nvidia has established, observing that Broadcom’s approximately $300 million revenue outperformance appeared underwhelming relative to Nvidia’s recent spectacular results.

“The magnitude is just not quite enough,” Acree explained to Yahoo Finance.

Forward Outlook Disappointed

The company’s projections intensified investor concerns. Broadcom issued fourth-quarter total revenue guidance of roughly $34.8 billion, trailing the $35.03 billion analyst estimate compiled by LSEG. The company forecasted Q4 AI chip revenue at $21.7 billion, representing a 236% annual increase, yet market participants wanted stronger numbers.

Chief Executive Hock Tan increased the company’s extended outlook. Broadcom now anticipates approximately $115 billion in AI semiconductor revenue for fiscal 2027, elevated from the previous $100 billion projection, and expects that figure could potentially double to $230 billion by fiscal 2028.

The challenge lies in Morgan Stanley’s pre-earnings model, which already incorporated $120 billion for fiscal 2027, while certain investor expectations had climbed beyond $150 billion. Consequently, even an upgraded forecast landed below where segments of the market had positioned themselves.

Competitive Challenges Emerging

The decline wasn’t solely driven by elevated expectations. Broadcom confronts mounting competition in the custom silicon market. Reports indicate Google has broadened its chip development collaboration with Marvell, triggering concerns about Broadcom’s ability to retain future accelerator spending.

JPMorgan analyst Harlan Sur contended prior to the earnings announcement that worries surrounding Broadcom’s Google partnership were exaggerated, highlighting the company’s extensive track record and participation in upcoming TPU generations. BMO analyst Harsh Kumar positions Broadcom as the second-leading AI chip provider behind only Nvidia.

AI processors and networking solutions currently represent over half of Broadcom’s overall semiconductor revenue, which totaled $20.84 billion during the quarter.

So far this year, AVGO has advanced 6%, underperforming Nvidia’s 20% appreciation.