Shares of Broadcom have recently faced turbulence, shedding more than 11% in the wake of its fiscal 2025 fourth-quarter results released on December 11. Despite this setback, the semiconductor giant has experienced strong performance over the past year, with a notable 52% increase in stock value, primarily driven by its expanding role in the artificial intelligence (AI) chip market.
In its latest earnings report, Broadcom announced a record revenue of $18 billion for the fourth quarter, marking a 28% rise year-over-year. The company’s non-GAAP earnings also showed impressive growth, increasing by 37% to reach $1.95 per share, surpassing Wall Street expectations that estimated earnings of $1.87 per share against a revenue of $17.5 billion. These strong results prompted a optimistic outlook, as Broadcom expects revenues of $19.1 billion in the current quarter, a figure that exceeds the $18.5 billion consensus estimate.
However, investor sentiment was dampened by two significant concerns. Firstly, the company’s increasing AI revenue appeared to be negatively impacting its profit margins. Broadcom’s management indicated that it anticipates a sequential decline in gross margins of 100 basis points for the upcoming quarter due to a shift towards a higher mix of AI products. This news raised red flags for investors who closely monitor profitability alongside growth.
Secondly, Broadcom’s AI order backlog of $73 billion, projected for fulfillment over the next six quarters, fell short of the previous quarter’s backlog of $110 billion, which naturally led to skepticism regarding future growth. The lack of full-year guidance added to the uncertainty, causing investors to reassess the stock amid its relatively high valuation, trading at 26 times sales and 71 times trailing earnings.
Despite the recent drop in stock prices, analysts retain a bullish outlook on Broadcom’s future. The median price target is set at $475, potentially providing a 39% upside from current levels, and 92% of the 50 analysts monitoring the stock recommend a buy. This optimism is largely underpinned by Broadcom’s robust AI revenue, which surged by 74% year-over-year in the last quarter. The company has forecasted that AI revenue will continue its upward trajectory, predicting a doubling to $8.2 billion in fiscal Q1.
Interestingly, while Broadcom is not exclusively focused on AI, with only about one-third of its overall revenue of $63 billion last year deriving from this sector, it remains a significant driver of future growth. As the company progresses in fulfilling its substantial AI semiconductor backlog, there is potential for quarterly revenue from this segment to achieve $12 billion. Looking ahead, analysts project that Broadcom’s overall revenue could soar to approximately $97 billion this fiscal year, driven by a combined total of nearly $48 billion from AI and sustained growth from its non-AI business, which is expected to reach nearly $49 billion.
In light of these projections and the anticipated revenue growth, some analysts argue that the current price point, while seemingly high, could be justified. The accelerating growth suggests there may be significant upside for Broadcom as it moves into 2026, making it a potentially attractive buying opportunity following the recent pullback in stock price.
