Broadcom's shares fell more than 11% on Friday after the company reported quarterly earnings that raised concerns among investors about the profitability of its artificial intelligence business.
Broadcom released its earnings report after the market closed on Thursday, exceeding Wall Street expectations. The core chip supplier to Google disclosed that orders from AI research firm Anthropic had surged to $21 billion.
However, Broadcom also projected that its gross margin for the quarter would fall to 76.9%, down from 79% in the same period last year. This news caused the chipmaker's market capitalization to evaporate by more than $200 billion in a single day on Friday. While this gross margin figure remains in a very high profit range, it represents a decline compared to 77.9% in the previous quarter and 78.3% in the third quarter.
Meanwhile, Broadcom's sales of AI chips surged 74% year-on-year to $6.4 billion, exceeding the $6.2 billion expectation given by Wall Street analysts tracked by Bloomberg; total revenue increased by nearly 30% year-on-year to $18 billion, higher than the market expectation of $17.5 billion; and earnings per share rose from $1.42 to $1.95.
Said by Analyst Ross Seymour
In a research note sent to clients on Friday, Deutsche Bank analyst Ross Seymour commented on Broadcom's earnings report, stating, "While AI-related revenue surged across the board, this growth came at the cost of sacrificing profit margins."
This week, investors began selling tech stocks following earnings reports from Broadcom and Oracle (ORCL). The Nasdaq Composite Index fell 1.4% on Friday, as concerns about the payback period for AI investments in the tech sector persisted.
Oracle disclosed in its quarterly earnings report released on Thursday that AI-related investments had led to increased costs, causing its stock price to fall by more than 14%. Even after Friday's sharp drop, Broadcom's stock price has still risen 3% over the past month; while Oracle's stock price has fallen nearly 50% from its September high and has also dropped 20% in the past month.
Historically, most semiconductor manufacturers operate in a manner similar to commodity companies—with low product differentiation, intense market competition, and thin profit margins.
The influence of Artificial intelligence chips
The emergence of AI chips has disrupted this landscape.
A few companies, particularly Nvidia, have dominated the market with highly specialized chip products. Extremely high demand and supply shortages have allowed these companies to command premiums and earn profits far exceeding the industry average.
However, as more competitors enter the AI chip market and supply increases, some analysts worry that the profit model in this sector may eventually revert to that of the traditional semiconductor market—chips becoming more like commodities, companies having less pricing power, and profit margins narrowing.
In a client research note on Friday, BNP Paribas analyst Carl Ackman specifically pointed out that investors are concerned about Broadcom's new $11 billion order from Anthropic to supply server racks equipped with Google's Tensor Processing Unit (TPU) AI chips. The high cost pass-through could lead to a decline in profit margins.
In other words, Broadcom simply passed on the manufacturing cost of the TPU to Anthropic in this order without adding a markup, thus failing to profit from the order itself.
However, Wall Street remains optimistic about Broadcom's prospects. The company signed a major agreement with OpenAI in October to customize chips with a total power of 10 gigawatts for the ChatGPT developer, with related revenue expected to begin to materialize in 2027.
Ackman believes that market concerns about Broadcom's profitability are "short-sighted." In his view, Broadcom's development opportunities as a full-stack AI system provider are expanding, with its business encompassing complete server racks equipped with chips and network solutions.
Bernstein analyst Stacy Rasgon is also optimistic about Broadcom. He believes the recent stock price decline stems from widespread market concerns about AI concept stocks, while Broadcom's own AI business is not only consistently exceeding expectations but also experiencing accelerating growth.
Source: Yaho
