Broadcom Slides After Q2 as AI Guide Fails to Surprise a High Bar

Broadcom (NASDAQ: AVGO) reported very good fiscal Q2 results on Wednesday. Sales of AI semiconductors rose 143% year-over-year to $10.8 billion, overall sales rose 48% to $22.19 billion, and net income rose 88% to $9.31 billion.

The company predicted Q3 sales would be $29.4 billion, which would be 84% year-over-year growth. In after-hours trade, the stock did fall, going down more than 3.8%. It lost as much as 7% in a short time before recovering half of the loss.

Shares have gone up 40% year-to-date, from $289 in late March to $479. The market's message is that a good but not exceptional quarter isn't enough to clear the bar the stock set for itself.

What the Numbers Actually Showed

In most ways, the headline numbers came in a little above what was expected.

The company's $22.19 billion in sales was just a little more than the $22.27 billion that was expected, setting the tone for the rest of the report. The adjusted EPS of $2.44 was higher than the expectation of $2.40. Adjusted EBITDA went up 52% to $15.24 billion, which is 69% of sales. Free cash flow was $10.26 billion, or 46% of sales. This is a huge number that would make headlines in any other earnings season, but it didn't make much of an impact in AI.

The semiconductor segment delivered: custom AI chips and networking parts drove $15.1 billion in semiconductor solutions sales, which was more than the $14.72 billion StreetAccount predicted. The AI sub-segment, which includes accelerators and networking for AI tasks, grew 143% year-over-year to $10.8 billion, which was more than the company expected.

Infrastructure software was the weak spot. However, it made $7.18 billion in Q2, which was up 9% year-over-year but less than the $7.32 billion that experts had predicted. The software business that VMware bought is growing, but not as fast as the market wanted it to. This is happening at the same time as the story about AI speeding up.

The $100 Billion AI Forecast That Wasn't Raised

It wasn't the Q2 numbers that caused people to sell; it was what CEO Hock Tan didn't say. Broadcom's stock went up from $289 to $479 on hopes that it would raise its full-year revenue target for AI semiconductors to more than $100 billion.

Instead, investors got a reaffirmation: "We expect this momentum to continue into fiscal year 2027 and reiterate our AI semiconductor revenue guidance to be in excess of $100 billion."

Repeat, don't raise. "In line with prior guidance" sounds like bad news for a stock that has gone up almost nine times since the end of 2022 and 40% in just one quarter.

Tan's Q3 AI revenue guidance of $16 billion, which means growth of more than 200% year-over-year and a sharp acceleration from Q2's $10.8 billion, is the lowest number that can go wrong.

That kind of AI income growth is really impressive. But the market had priced in even more, and the fact that the full-year goal hadn't been raised showed that expectations were higher than what management was willing to commit to.

The "Chips Only" Strategic Shift

During the earnings call, Tan made an important announcement: Broadcom would no longer offer "chips only" to customers, as it had previously said it would. Instead, it would offer "complete integrated AI systems." 

The change makes Broadcom's competitive situation easier because it means the company can focus on what it does best (custom ASIC design and chip production) instead of competing with systems integrators. However, the business is smaller than what was expected. Customers who were looking forward to turnkey AI system options may need to find more parts somewhere else because of the change.

Tan agreed that predicting short-term demand was hard: "The bookings that are coming are not for immediate delivery." While they hope to have some, they all know that they need to get a lot of other things in order before they can give. That honesty is good from a strategic point of view, but it doesn't speed up the process of recognising income in the near future.

The Six Core Customers Driving AI Growth

Tan confirmed that Anthropic, Google, Meta, OpenAI, and the other five customers are Broadcom's six main custom chip customers that are driving its AI revenue increase. The variety of customers, including the biggest hyperscalers and the richest AI model makers, makes the business more stable in a way that pure-play GPU alternatives can't match.

Tan told the public in December that Anthropic had placed an order for 10 billion chips. The Anthropic-Amazon compute deal then made Broadcom indirectly involved with that relationship.

The tensor processing unit (TPU) from Google is still there. Broadcom has a major customer in the area of AI chip design, and the company's total revenue has grown by 48%, from $15 billion to $22.19 billion. This shows that the custom ASIC market is growing as expected.

That said, one expert said that Broadcom is still "one of the clearest AI winners in the market," but the stock price already took that into account. Even though they had a clean quarter, strong AI revenue growth, and a strong Q3 guide, they weren't enough to clear a bar set by a 40% YTD gain.

The free cash flow of $10.26 billion, the Q3 guide of $29.4 billion, and the $100 billion AI revenue goal for 2026 all back the structural thesis. The short-term danger is that the stock needs either a higher full-year AI forecast or a sequential acceleration beyond the $16 billion Q3 guide in order to make a case for going much higher from where it is now.

The next thing that will show if Wednesday's drop was just people taking profits or a more serious reset is the Q3 results and any comments on whether the six-customer AI queue is moving forward or staying the same.