ar
- Broadcom shares fell after the company warned that AI chip sales are hurting profit margins, despite strong earnings.
- The drop spread to other AI stocks as investors grew worried about high valuations and heavy AI spending.
Broadcom has become the latest AI stock in focus after shares extended losses on rising concerns over AI spending and profitability.
The chip designer warned that AI chip sales are rising, but more of that growth is coming from custom chips that earn lower profits. As a result, margins are under pressure, and AI is appearing to be less profitable than investors expected.
This warning added to broader concerns about whether Big Tech’s massive AI spending will pay off, especially after Oracle’s stock fell due to heavy, debt-funded investment in AI infrastructure.
With tech stock valuations at record highs, investors are taking a closer look at AI spending. Circular deals, where companies invest in their own customers, are also increasing fears that parts of the AI boom may be turning into a bubble.
Strong Results Fail to Calm Investors
Broadcom’s Q4 results and guidance surpassed Wall Street estimates, with EPS coming in at $1.95, beating its forecast of $1.86 while revenue came in at $18 billion, also beating its estimate of $17.49 billion. But these results didn’t matter much to the markets. ⁽¹⁾
Broadcom said its margins will be pressured through the year due to a higher mix of AI revenue. One concern among investors is that margins are coming down due to higher up-front costs. CFO Kirsten Spears said that gross margins will be lower for some AI chip systems because the company must buy more parts to produce server racks. ⁽²⁾
While OpenAI has been a very valuable customer following a multi-billion-dollar deal that was announced in October, CEO Tan reduced some hopes for the deal, telling investors that Broadcom isn’t expecting much contribution in 2026. ⁽³⁾
Broadcom’s services are crucial for companies that develop custom AI processors, which secured massive contracts, including significant orders from Anthropic. The company said it has a $73 billion backlog it expects to ship over the next 18 months. ⁽⁴⁾
The company reported revenue growth driven by a surge in AI chip sales, topping analyst expectations. CEO Tan said Broadcom expects AI chip sales this quarter to double from a year earlier, from both custom AI chips and AI networking semiconductors. ⁽⁵⁾
Market-Wide Selloff Hits AI Infrastructure Names
Last Friday, Broadcom’s stock price faced its worst day since January, dropping 11% as investors ran for the exits on the AI trade. Oracle fell 13% last Thursday and extended declines following its earnings report, while Nvidia and AMD dropped as well. Major tech stock valuations remained very high, sparking concerns of an AI bubble.
Broadcom 1H Chart / Source: TradingView
AI growth has been a major driver for stock market gains and the economy this year, but since new concerns rose in October, tech stocks have continued to be under pressure.
