Broadcom (AVGO) just reported another monster quarter, then saw its stock take a beating. Shares tanked 11% to nearly $360, erasing over $200 billion in market value in a single session.
The results themselves were mostly solid.
The tech giant posted nearly $18 billion in Q4 sales, a clear beat, along with a bullish $19.1 billion Q1 outlook. On top of that, its $1.95 EPS surged past market estimates by a sizeable eight cents.
However, it didn’t matter. Its management warned that rising AI-chip demand would compress gross margins by 100 basis points, according to Reuters, with custom accelerators offering lower profitability.
Nevertheless, Morgan Stanley remains unfazed.
A 5-star analyst at the firm in Joseph Moore just reaffirmed his overweight rating, while bumping Broadcom’s price target from $443 to $462 (a 28% increase from its current price).
Moore calls the long-term setup “very strong,” arguing that the recent rout is an overreaction to near-term noise, far from being a crack in Broadcom’s fundamentals.
Broadcom shares plunged 11% despite a monster quarter.
Photo by Bloomberg on Getty Images
Broadcom’s quarter was strong, but the market reaction wasn’t
Broadcom dished out another impressive earnings report, capping off an excellent year.
Revenues and earnings beat estimates by substantial margins, the biggest in the past four quarters.
Here’s how Broadcom fared in the past four quarters:
- FQ4 2025 (Oct. 2025): EPS $1.95 (beat by $0.08), revenue $18.02 billion (beat by $555.89 million, +28.18% year over year)
- FQ3 2025 (July 2025): EPS $1.69 (beat by $0.03), revenue $15.95 billion (beat by $129.31 million, +22.03% YoY)
- FQ2 2025 (April 2025): EPS $1.58 (beat by $0.01), revenue $15.00 billion (beat by $28.43 million, +20.16% YoY)
- FQ1 2025 (Jan. 2025): EPS $1.60 (beat by $0.09), revenue $14.92 billion (beat by $325.27 million, +24.71% YoY)
Additionally, its management guided Q1 sales to be $19.1 billion, comfortably ahead of the Street’s estimate of $18.31 billion. AI sales alone are expected to reach $8.2 billion, double last year’s level.
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Investors, however, are focused on one line, noting that the shift in the AI mix will compress gross margin by 100 basis points, due to lower-margin custom accelerator systems.
Here’s what other big banks have to say about Broadcom stock.
- Bank of America: $500 price target, buy (39% upside). Bumped from $460 on growing AI-chip demand.
- Goldman Sachs: $450 price target, buy (25% upside). Boosted from $435; says Broadcom remains a long-term AI-infrastructure winner.
- UBS: $472 price target, buy (31% upside). Upped from $415, on the back of explosive AI and networking growth.
- Bernstein: $475 price target, outperform (32% upside): Lifted from $400, citing Broadcom’s impressive earnings power.
Moore couldn’t believe the stock market’s negative reaction.
“Overall, these are very good results… showing near-term upside for the first time in a while,” he said, noting Broadcom grew from three to five AI customers while continuing to lift expectations each quarter.
Moreover, AI-related sales came in ahead of forecasts, with Q1 AI guidance 20% above his model. The company also bumped full-year sales and EPS forecasts more meaningfully than in the past.
In Moore’s view, this quarter wasn’t just a disappointment, but it was a “short-term inflection.” The market just didn’t bother to look past margins.
Broadcom’s AI growth still works
Broadcom’s AI story becomes even bigger, but slightly more complicated, when factoring in the Anthropic wildcard.
Moore feels Broadcom’s outlook for the second half of 2026 remains “very strong,” but it brings into play real modeling headaches.
The AI bellwether has logged a jaw-dropping $21 billion in orders from Anthropic already, with a $10 billion commitment just last quarter, along with another $11 billion announced on the call.
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Both are expected to ship in the back half of 2026, meaning one customer accounts for a massive 40% of Moore’s full-year AI estimate.
The primary challenge, though, is that these systems run on Google’s TPUarchitecture, meaning some margins will accrue to Google.
Also, with this being a full rack-scale system sale, gross margins are likely to be meaningfully lower.
Even so, Moore remains upbeat over Broadcom’s “very strong growth potential” across custom chipmaking and networking.
In fact, he argues that the numbers still look conservative, with Broadcom’s management “among the most credible” in the sector.
Broadcom admits AI boom carries a margin trade-off
Broadcom’s management was quick to acknowledge that the AI surge comes with real margin trade-offs.
CFO Kirsten Spears told investors to factor in some compression right away, forecasting a 100 basis points sequential drop in Q1 2026, “reflecting a higher mix of AI revenue.”
Later in the Q&A, she added: “When we start shipping more systems, we’ll pass through more cost in the rack, so those gross margins will be lower.”
More AI Stocks:
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- AI plays expanding role in predicting natural disasters
- Morgan Stanley revamps Nvidia’s price target ahead of big Q3
- Cathie Wood buys $16.2 million of sinking AI stock
However, CEO Hock Tan felt investors needed to look at the bigger picture.
Though he acknowledged that “AI revenue has a lower gross margin than the rest of our business,” he said the company will still “get the operating leverage” it needs as volumes continue to grow.
In other words, gross margins may take a hit, but gross profit dollars and operating income will still continue to impress as AI revenue ramps up.
The impressive numbers back that up.
Broadcom, Investing.com reports, now has a $73 billion AI-related backlog to ship over the next 18 months, expecting AI chip sales to double year over year to $8.2 billion in Q1 alone.
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