Broadcom (AVGO) just posted the kind of quarter that most chipmakers can only dream of. Record revenues, triple-digit AI sales, and a growing list of notable clients.
Then the shares fell.
Actions of Broadcom fell 12.59% on June 4 to close at $418.91, the steepest one-day drop in more than a year.
The slide did not stop there. At the close on June 9, shares were trading at $396.60, a drop of 18.64% in five trading days.
The share price drop may be related to something CEO Hock Tan said.
Why Broadcom Stock Continued to Fall After Record Quarter in AI
Investors expected Broadcom to raise its AI forecast, but it didn’t.
Instead of raising the company’s target of more than $100 billion in AI semiconductor revenue by fiscal 2027, Tan reaffirmed it, according to CNBC.
And this made the market uncomfortable.
So the biggest blow followed.
We’re just potato chips.
Tan said Broadcom will now sell “only chips,” moving away from the fully integrated AI systems it had previously promised its customers, according to the earnings call transcript on Investing.com.
That measure dampens hopes for the higher-margin business that investors were counting on.
What Broadcom does and how its AI chip business got so big
Most people know Broadcom as a chip company and that label fits.
It co-designs custom AI accelerators, called XPUs, with individual cloud giants, and then sells the networking silicon that connects thousands of those chips within a data center.
That business has skyrocketed. AI Semiconductor Revenue Up 143% Year Over Year to $10.8 billion last quarter, while total revenue hit a record $22.19 billion, an increase of 48%, Bloomberg reported.
That race made the fall harder.
AVGO had rallied for weeks to turn a profit, raising the bar for success well above the company’s official guidance.
The “chip-only” switch that worried Broadcom AI supporters
Selling chips just means giving up servers and complete systems that generate higher margins than the chips alone, and the pressure is already being felt.
Broadcom cut third-quarter gross margin from 77% to 74%, because lower-margin AI chips now account for a larger share of revenue than its software business, Barron’s reported.
Related: HSBC massively renews Broadcom share price target
The change most strongly affects artificial intelligence labs that buy custom silicon from Broadcom.
Tan named Anthropic, Google, Meta and OpenAI among the top six custom chip customers, all of which design their own silicon through partners to control costs and supply.
Why it is important for AVGO that Google relies on other providers
Hok Tan acknowledged that Google, Broadcom’s largest AI customer, will likely use more than one chip supplier in the future.