By Broadcom stock (NASDAQ: AVGO) plummeted nearly 9% on Friday after the chipmaker warned that surging AI revenue would carry lower profit margins.
The development disappointed investors who had been betting on the company’s transition into custom chips for hyperscalers.
Friday’s sell-off came despite the company beating Wall Street estimates with fiscal Q4 revenue of $18.02 billion and guiding fiscal Q1 to $19.1 billion, both well above consensus expectations.
Broadcom’s stock plunge on Friday raised a critical question: is the AI chip boom hitting profitability headwinds even as demand accelerates?
Broadcom stock: Earnings beat, but margin warning stings
Broadcom delivered textbook earnings fundamentals.
Q4 adjusted EPS reached $1.95 on revenue of $18.02 billion, topping estimates of $1.87 and $17.45 billion. AI semiconductor revenue hit $8.3 billion in Q4, smashing prior guidance of $6.2 billion.
CEO Hock Tan highlighted a $73 billion backlog across custom accelerators, Ethernet switches, and AI infrastructure components, expected to ship over the next 18 months, visibility that most chipmakers can only dream of.
For fiscal 2025, the company achieved record revenue of $64 billion (up 24%) with AI revenue soaring 65% to $20 billion.
Free cash flow grew 39% to $26.9 billion, and Broadcom declared a 10% dividend increase, signaling cash flow confidence.
But here’s where the momentum broke: CFO Kirsten Spears projected Q1 gross margins would decline approximately 100 basis points sequentially due to a higher mix of AI revenue.
The analysts warned that lower-margin system sales, where Broadcom passes through component costs to customers, will represent a growing share of revenue.
The operating margins are expected to remain robust due to the leverage on fixed costs, but gross margin percentage compression is real.
What the margin math really means
Investors reacted sharply because the warning exposed an uncomfortable truth: the custom AI chips and systems carry fundamentally lower gross margins than traditional software products.
Broadcom’s custom accelerators and data center systems require higher component pass-through costs, eroding the gross margin percentage even as absolute dollar profit grows.
The analysts also flagged another major concern: the concentration risk.
The $73 billion backlog relies on just five customers, primarily Google, Meta, and now Anthropic, and system sales have lower margins than the core networking business.
If any major customer slows orders or diverts to in-house chips, Broadcom’s growth story could hit an air pocket.
Friday’s sell-off was likely overblown. Broadcom’s operating margins remain industry-leading at 66.2% in Q4, and the company’s focus on custom silicon positions it as a structural beneficiary of hyperscalers’ push for architectural control.
The $73 billion backlog provides unusual revenue visibility.
However, the margin warning deserves serious attention. Broadcom is trading on growth assumptions that hinge on sustaining high pricing power and order flow from a concentrated customer base.
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