Broadcom, a leading AI chipmaker, experienced a sharp 8% stock decline on Friday despite reporting stellar quarterly earnings that initially sent shares higher in after-hours trading. The dramatic reversal came as investors digested CEO Hock Tan’s commentary during the earnings call, revealing growing anxiety about the sustainability of AI investments across the semiconductor sector.
The company exceeded expectations on both earnings and revenue, with particularly impressive AI semiconductor performance. Broadcom projected its AI semiconductor revenue would double to $8.2 billion in the following quarter, a remarkable growth trajectory that would typically excite investors. Additionally, the chipmaker disclosed a substantial $73 billion backlog of AI product orders spanning the next 18 months, demonstrating robust demand for its AI infrastructure solutions.
However, investors were left disappointed by what they perceived as insufficient guidance for full-year AI revenue. Josh Meyers, an executive director at JPMorgan, captured the market’s confusion, noting: “It was surprising to see a call that started with such good numbers and such a great story end with frustration.” The lack of visibility into fiscal year 2027 AI revenue became an unexpected sticking point for shareholders.
Paul Hickey, co-founder of Bespoke Investment Group, observed that investors seemed “underwhelmed” by the $73 billion order backlog—a figure that many analysts would consider extraordinary. This reaction highlights the elevated expectations surrounding AI chip companies and the intense scrutiny they face from investors seeking confirmation of continued exponential growth.
The sell-off extended beyond Broadcom, dragging down other semiconductor stocks including Marvell (-1%), Micron Technology (-3%), and Advanced Micro Devices (-1%). This broader sector weakness began earlier in the week following Oracle’s disappointing earnings report, which saw shares plunge 14% on concerns about AI overspending and lower-than-expected revenue.
Analysts suggest multiple factors contributed to Broadcom’s decline: the stock represents a “crowded trade” in an already popular AI theme, some investors felt CEO Tan was too reserved in his commentary, and the market may simply need to “take a breath” from the AI rally. Despite Friday’s drop, Broadcom shares remain up more than 56% year-to-date, reflecting the stock’s strong performance throughout 2024.
Key Quotes
It was surprising to see a call that started with such good numbers and such a great story end with frustration.
Josh Meyers, executive director at JPMorgan, captured the paradoxical market reaction to Broadcom’s earnings call, highlighting how strong financial results weren’t enough to satisfy investor expectations for AI guidance.
Somehow some investors seized on this as ’not enough,’ which compounded an earlier narrative today that somehow we needed more visibility on F27 AI revenue (no idea why this is suddenly an issue).
JPMorgan’s Meyers expressed bewilderment at investors’ negative reaction to Broadcom’s $73 billion AI order backlog, suggesting the market’s expectations for AI chip companies have become unreasonably elevated.
Our Take
The Broadcom sell-off exemplifies a dangerous disconnect between AI fundamentals and market psychology. A company doubling its AI revenue to $8.2 billion quarterly while holding $73 billion in orders should be celebrated, not punished. This reaction signals that AI stocks have entered a “prove it continuously” phase where even exceptional performance meets skepticism. The broader semiconductor weakness following Oracle’s earnings suggests investors are recalibrating AI valuations across the board, potentially creating opportunities for long-term investors willing to look past short-term volatility. However, this also indicates that the easy money phase of AI investing may be over—companies will need to demonstrate not just revenue growth, but sustainable margins and clear paths to profitability. The market’s demand for fiscal 2027 visibility reflects anxiety about whether current AI spending levels are sustainable or represent a bubble that could deflate rapidly.
Why This Matters
This market reaction to Broadcom’s earnings reveals a critical inflection point in AI investment sentiment. Despite doubling AI revenue projections and maintaining a massive order backlog, investors are becoming increasingly demanding about transparency and growth sustainability in the AI semiconductor sector. This represents a maturation of the AI investment thesis—moving from euphoric acceptance of any AI-related growth to more critical evaluation of long-term profitability and competitive positioning.
The broader implications extend across the technology sector, as evidenced by similar post-earnings declines at Meta, Microsoft, and Oracle. Investors are scrutinizing AI capital expenditures more carefully, questioning whether massive infrastructure investments will translate into proportional returns. For businesses dependent on AI chip supply, this volatility could impact future pricing and availability. The semiconductor industry may face a period of consolidation and rationalization as market expectations reset, potentially affecting innovation timelines and the pace of AI deployment across industries. This shift from growth-at-any-cost to sustainable, profitable AI business models will likely define the next phase of the AI revolution.
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