Broadcom stock wavers as strong results not enough to keep investors happy

Broadcom (AVGO) trimmed earlier losses in extended trading on Wednesday after tumbling as much as 4% immediately following its earnings release. Shares of the Palo Alto, California-based company were down over 1% in extended trading, recouping some earlier losses. While the Palo Alto-based chipmaker reported quarterly metrics fueled by surging artificial intelligence infrastructure spending, market reaction reflected growing tension between massive corporate outlays and investor returns.

Shares of the company have gained about 6% this year, significantly underperforming rivals and the broader semiconductor index (.SOX), as AI spending concerns and increased competition persist, including Marvell’s recent custom chip deal with Google, according to reporting by Reuters.

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Broadcom’s financial performance for the fiscal third quarter topped Wall Street targets across major metrics, driven primarily by a wave of data center expansion. The company posted adjusted earnings per share of $3.32, compared with estimates of $3.24, edging past Wall Street expectations of $3.23 according to Yahoo Finance data.

Total quarterly revenue grew 86% year over year to reach $29.6 billion (noted as $29.59 billion in Reuters figures), comfortably exceeding consensus estimates of approximately $29.45 billion and beating estimates of $29.36 billion. The primary catalyst behind the expansion was the company’s semiconductor division, where third-quarter AI chip sales more than tripled to $16.7 billion, growing 221% year over year and 54% quarter over quarter.

“Demand for our custom AI accelerators and networking continues to be very strong,” CEO Hock Tan said in the company’s earnings release.

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Looking ahead, Broadcom lifted its fiscal 2027 AI chip revenue forecast to about $115 billion from a prior forecast of over $100 billion, with the fiscal year ending October 2027. The company expects AI chip revenue to double to roughly $230 billion in fiscal 2028. Bookings for Broadcom’s AI chips topped $30 billion last quarter alone, offering fresh evidence that Big Tech’s appetite for AI infrastructure remains undiminished as investors scrutinize returns on massive spending.

CEO Hock Tan told analysts Broadcom has secured enough supply to support the higher forecast for next year, while customer demand continues to mount. He said the company has visibility into additional AI infrastructure deployments through 2028, including more than 10 gigawatts for Anthropic, over 5 GW for OpenAI and 3 GW for Meta. Broadcom’s custom AI chips are used by companies including Meta Platforms (META.O), Alphabet’s Google (GOOGL.O) and OpenAI.

“That is committed capacity, not aspiration, and it closes most of the gap to what the market wanted,” said Patrick Moorhead, CEO of analyst firm Moor Insights & Strategy.

Despite the aggressive multi-year projections, Broadcom’s guidance for the immediate current quarter landed slightly below consensus. Fourth-quarter revenue is expected to be about $34.8 billion, below the $35.05 billion consensus expected by analysts according to Bloomberg data, and below analysts’ average estimate of $35.03 billion according to data compiled by LSEG.

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Market reaction underscored the heavy expectations placed on companies deeply tied to the artificial intelligence trade. Equity research analysts pointed out that even exceptional financial beats may no longer satisfy equity markets accustomed to explosive upward revisions.

“I can understand the selling pressure,” Cody Acree, StoneX financial equity research analyst, told Yahoo Finance. The analyst, who has a Buy rating on the stock, noted the chipmaker’s fiscal Q3 revenue and earnings beat was “not enough to keep investors happy.” “The magnitude is not quite enough from a top and bottom line standpoint on the beat and raise when you have a company that is this levered to AI,” said Acree.

Acree noted that Broadcom is really just second only to Nvidia as far as its ecosystem across the data center, adding, It's just a matter of when do you enter and when do you trade around a position.

According to CNBC coverage of the broader semiconductor space, chipmakers Broadcom and Micron Technology sank on Thursday, leading a broad sector sell-off as investors fled the semiconductor space. John Vinh, equity research analyst at Keybanc Capital Markets, said the growing pressure on Broadcom and other semiconductor stocks is warranted.

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“These stocks have all had very strong runs,” Vinh told CNBC’s “Squawk Box” on Thursday, pointing to repeated upward revisions, especially on the AI front.

Vinh suggested that the Broadcom reversal indicates that market expectations have caught up with the chip sector run, and noted that Broadcom has suffered a degree of share loss within its largest customer, Google, which has started diversifying toward other chip suppliers. Vinh explained that the near-term pull-back makes sense, but added he remains optimistic on Broadcom.

Keith Lerner, CIO and chief market strategist at Truist Wealth, said that a sell-off was normal after a strong run, adding on CNBC’s “Closing Bellon Wednesday thatwe’re due for a rest.”

“We’ve come a long way. Fundamentals are solid,” he said. “Bull market still deserves a benefit of the doubt, but often markets are two steps forward, one step back. We’ve had three steps forward, so maybe at least a mini step back, or at least some sideways chop,” Lerner said.