Broadcom Earnings Preview: AI Revenue May Nearly Double, But Strong Performance May Not Save the Stock Price

Broadcom will announce its financial results after the market closes on Wednesday. Wall Street is expecting the company to report strong performance, but media reports suggest that judging by recent trading trends, even results that exceed already high market expectations may not be enough to reverse months of share price declines.

Broadcom's stock price has fallen 24% from its all-time high last December, significantly underperforming the S&P 500 Index. This wave of sell-off is part of a broader investor retreat from large-cap technology stocks. The market is concerned about whether the hundreds of billions of dollars invested by companies to develop AI capabilities can be sustained in the long term.

Currently, Broadcom is the seventh largest company by market capitalization in the S&P 500, worth about $1.5 trillion. The company partners with AI giants like Alphabet to supply chips, directly benefiting from this wave of AI investment.

AI Performance May Double, Focus on Backlog Amounts

Analysts believe that while these concerns may materialize in the future, Broadcom's fundamentals still look robust for now.

Analysts predict that the company's adjusted earnings per share in the first quarter of this fiscal year will increase by 27% year-over-year to $2.03; revenue is expected to rise 29% year-over-year to about $19.3 billion. Of this, AI-related sales are expected to nearly double to about $8.2 billion. If the company provides positive guidance, Wall Street would not be surprised.

Paul Meeks, head of technology research at Freedom Capital Markets, stated:

"Broadcom will certainly deliver a lot of good news. But the question is, that might not matter."

He cited Nvidia's stock performance after last week's earnings report as an example. Nvidia's results beat Wall Street's expectations, and due to strong product demand and hyperscale cloud providers' plans to increase capital expenditures, the company also raised its guidance. However, Nvidia's stock fell 9.4% in the two trading days after the report, marking its worst two-day performance since April.

After Broadcom released its previous financial results last December, its stock also suffered a sharp drop of over 11% on the day—the biggest single-day decline in nearly a year. The issue then was that the company disclosed a $73 billion backlog of AI product orders for the next six quarters, which was lower than market expectations.

Therefore, investors will naturally focus on whether the AI product order backlog is updated this time. In addition, the market will also pay attention to the progress of the Tensor Processing Unit (TPU) chips that Broadcom is developing for Google. Orders from Google are expected to increase significantly in the second half of this year. Meanwhile, Broadcom's collaboration with OpenAI is also expected to boost business growth and continue through 2027.

Analyst: Broadcom's "Moat is Very Deep"

Shaon Baqui, Senior Technology Research Analyst at Janus Henderson, who holds Broadcom shares, stated:

"A very important point for Broadcom is to highlight their genuine strength in designing large-scale custom chips."

"They have already developed seven generations of TPU chips for Google and have a very strong track record of collaboration. The ability to continuously deliver generation after generation is crucial, especially when competing with Nvidia."

"Manufacturing these gigantic AI accelerator chips is extremely challenging. I think Broadcom needs to emphasize that they actually have quite a deep moat in this area."

Another issue in Broadcom's last financial report was the profit margin. At that time, CEO Hock Tan stated that AI-related sales were dragging down the profit margin. The market expects Broadcom's adjusted gross margin in the first quarter of this fiscal year to be about 77%, down from 78% in the previous quarter and 79% a year ago.

Analysts may also raise questions about the company's software business. This sector will account for 42% of Broadcom's total revenue in 2025. In the past, it was seen as an important segment to balance semiconductor business cycle fluctuations. However, the recent overall decline in software stocks has also put pressure on Broadcom's share price.

Meeks of Freedom Capital commented:

"It will be interesting to see how they report this segment, and also their outlook for it."

"During the Q&A session of the earnings call, they will certainly be asked directly about the position of the software business in the company's overall strategy. In the past, this business was a good source of risk diversification, but in the era of AI, the market now sees it as a heavy burden."

The Stock Has Become Cheaper, But May Not Rebound

One outcome of the recent stock price decline is that Broadcom's valuation has become cheaper. But even so, the stock may still have room to fall further. Currently, Broadcom's forward P/E ratio is about 27 times, which is lower than the peak of 42 times in December last year, but still significantly higher than its five-year average of 22 times, and also higher than competitor Nvidia's 21 times.

Options traders expect Broadcom's stock to experience significant volatility after the earnings release. Current market pricing shows that the stock may swing about 7% up or down post-earnings.

Bloomberg Industry Research Analyst Kunjan Sobhani said there are three factors that could drive the stock price higher: announcing the addition of a hyperscale cloud customer that makes a significant revenue contribution, a substantial increase in AI order backlog during the same period, or positive comments from Hock Tan on cooperation with OpenAI and Anthropic.

But given the recent pessimistic reaction of the market to tech company earnings, even if these positive factors emerge, Broadcom's stock price may not rebound significantly as a result. Sobhani said:

"It seems now that the better the company performs, the worse the stock behaves. At least this is the case this earnings season."