Broadcom (AVGO) delivered another strong quarter, beating Wall Street’s expectations on both revenue and earnings. Yet despite the solid results, AVGO stock slid more than 6% in pre-market trading on Friday. The drop stems largely from Broadcom’s aggressive push into the AI chip market, which excites investors but also raises concerns about soaring costs and the unclear profitability of such massive long-term investments.
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For Q4 FY25, Broadcom posted earnings of $1.95 per share, beating analysts’ expectations of $1.87. Meanwhile, revenue climbed 24% to a record $64 billion for the full fiscal year, driven largely by demand for AI semiconductors and continued momentum from VMware.
What Went Wrong with Broadcom Earnings Report?
Well, the answer is margin concerns. During the earnings call, Broadcom warned that profit margins will dip next quarter as AI-related revenue becomes a larger part of the business. To be precise, CFO Kirsten Spears stated that the first-quarter consolidated gross margin would be down about 100 basis points. The company also noted that margins throughout the year will depend heavily on the balance between its infrastructure, software, and semiconductor sales.
Interestingly, CEO Hock Tan highlighted a massive $73 billion order backlog for the next 18 months, but even that wasn’t enough to ease worries.
Analysts Weigh in on Broadcom Margin Concerns
Top-rated analyst Kinngai Chan of Summit Insights added that margin worries aren’t the only issue. Broadcom’s deep dependence on just a few major AI customers is also weighing on investor confidence and contributed to the stock’s decline.
Chan pointed out that the company’s huge backlog still comes from just five customers, and many of the orders are for high-priced AI systems that carry lower margins. These system sales are expected to make up an even larger share of revenue in the second half of fiscal 2026, adding to investor concerns.
Meanwhile, five-star-rated analyst Gil Luria of D.A. Davidson noted that the drop in gross margins could signal a potential problem for Broadcom. He warned that rising costs tied to chip manufacturing partner TSMC (TSM) may limit how much profit Broadcom can generate from its custom AI processor business.
Is AVGO a Good Stock to Buy?
Currently, Wall Street has a Strong Buy consensus rating on Broadcom stock based on 24 Buys and one Hold assigned over the last three months. The average AVGO stock price target of $439.19 indicates 8.08% upside potential from current levels.
