Broadcom Stock Falls as AI Business Cuts Into Profit Margins

Broadcom’s latest quarterly update delivered a mixed message to investors. While the company projected stronger-than-expected revenue for the upcoming quarter, warnings of shrinking profit margins due to its expanding AI business caused its stock to drop 5% in after-hours trading.

AI Demand Boosts Revenue — But Squeezes Margins

Broadcom has been rapidly scaling its presence in the AI chip market, a space that demands heavy investment and often brings in lower-margin revenue. During the earnings call, CEO Hock Tan revealed that Broadcom currently holds a massive $73 billion order backlog, expected to be fulfilled over the next 18 months. Yet, this growth comes with a profitability challenge.

Chief Financial Officer Kirsten Spears explained that the company expects its gross margin to decline by nearly 100 basis points in Q1, mainly due to a larger share of revenue coming from AI-related products. These products — including custom AI processors and system-level hardware — typically carry lower margins compared to Broadcom’s traditional high-margin software or infrastructure segments.

Why Investors Are Concerned

Analysts say the company’s rising dependence on a small group of large AI customers is adding risk. According to Summit Insights analyst Kinngai Chan, five customers make up a significant portion of Broadcom’s AI backlog. Many of these orders involve full AI systems — which, although high-priced, generate thinner margins.

By the second half of fiscal 2026, these system sales are expected to make up a much larger share of Broadcom’s total revenue, potentially dragging margins down further.

Gil Luria, an analyst at D.A. Davidson, added that production costs from chip manufacturing partner TSMC may further pressure Broadcom’s profit potential in its custom AI processor segment.

AI Boom Continues to Fuel Spending

Despite profitability concerns, Broadcom is benefiting from the massive spending race among U.S. cloud giants. Companies like Google and Meta rely on Broadcom to design and manufacture advanced ASIC processors — a key competitor to Nvidia’s GPUs.

Analysts estimate that major cloud providers will collectively spend over $400 billion on AI infrastructure in 2025, supporting products like ChatGPT, Gemini, and Copilot.

However, this explosive spending — paired with high valuations and uncertain short-term returns — has sparked new debates about whether the tech world is edging toward an AI bubble.

Revenue Outlook Still Strong

Even with margin pressure, Broadcom remains optimistic. Tan announced that the company’s AI semiconductor revenue — which includes both custom processors and networking chips for AI data centers — is expected to double to $8.2 billion in the upcoming fiscal quarter.

The company forecasted total Q1 revenue of around $19.1 billion, beating Wall Street’s average prediction of $18.27 billion.

In the most recent quarter ending November 2, Broadcom reported $18.02 billion in revenue, surpassing expectations of $17.49 billion.