Broadcom recently announced strong fourth-quarter results for 2025, reporting nearly $18 billion in sales and an earnings per share (EPS) of $1.95, surpassing analysts’ expectations. Despite these impressive figures and a positive outlook for the first quarter of 2026, company shares fell sharply by 11%, wiping out over $200 billion in market value in a single day. Management highlighted concerns over gross margins due to increasing demand for AI chips, forecasting a 100 basis point compression in margins attributable to lower profitability from custom accelerators.
Notably, the bullish guidance for the upcoming quarter, projecting $19.1 billion in sales and a doubling of AI-related sales to $8.2 billion, did not sway investor sentiment. Morgan Stanley analyst Joseph Moore retained an overweight rating on Broadcom, raising the price target from $443 to $462, arguing the market’s reaction is an overreaction that overlooks the company’s strong fundamentals.
Major investment banks have issued optimistic price targets for Broadcom, with Bank of America setting theirs at $500, citing significant upside potential driven by AI chip demand. Other firms, including Goldman Sachs and UBS, echoed similar sentiments by increasing their price targets based on projected growth in AI and networking sectors.
While the AI surge presents some margin trade-offs, Broadcom’s executives emphasized the ongoing demand and potential for operating leverage as revenues from AI increase. The company is reportedly sitting on a substantial $73 billion AI-related backlog, which is expected to further bolster future sales.
Bold Points:
- Why this story matters: Broadcom’s financial performance and market reactions highlight investor concerns over profitability in rapidly growing sectors like AI.
- Key takeaway: Despite strong revenue growth, the market’s focus on margin compression reflects broader investor caution amidst evolving product demands.
- Opposing viewpoint: Some analysts argue that the stock market’s negative reaction is unjustified given the long-term potential and strong fundamentals of Broadcom.
