Broadcom stock reverses lower on a misinterpretation of what the CEO said on the earnings call
Broadcom reported another strong quarter and better-than-expected guidance for the quarter on Thursday evening. However, Club shares gave up their initial rise and traded sharply lower as the Q&A session of the post-earnings conference call began. Apparently investors were unhappy with CEO Hock Tan’s answer to an important question. Revenue rose 28% year over year to $18.02 billion in the fiscal 2025 fourth quarter ended Nov. 2, according to a consensus of analyst estimates compiled by LSEG; this was above the consensus estimate of $17.49 billion. Adjusted earnings per share rose 37% to $1.95, beating expectations of $1.86, according to LSEG data. Adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, rose 34% in the quarter to $12.22 billion, beating the FactSet consensus of $11.61 billion. Why we have it Broadcom is a high-quality semiconductor and software company led by the incredible CEO Hock Tan. The company is a major beneficiary of AI, with its networking and custom chip businesses. Competitors: Marvell Technology, Advanced Micro Devices, and Nvidia Last acquisition: November 21, 2024 Start date: August 24, 2023 Bottom line: Broadcom’s reported results were solid as revenue exceeded expectations thanks to strength in both operating segments (Semiconductor Solutions and Infrastructure Software). Margin performance was also strong, as the company’s overall adjusted operating income margin increased by approximately 350 basis points, or 3.5 percentage points, leading to strong year-over-year earnings growth beyond what the Street expected. In addition to strong results, revenue and EBITDA margin expectations for the first quarter of fiscal 2026 were also above expectations. Before touching on the part of the call that hit the stocks, we would like to emphasize that Tan’s words in general made us really excited for 2026. For starters, the CEO confirmed the rumors we heard on the last call that the fourth customer who placed a $10 billion order was indeed Anthropic, and that they were purchasing Ironwood XPUs, the seventh-generation TPUs on which Google’s Gemini 3 was trained and run. XPU is the term Broadcom uses to describe specialized chips, also called application-specific integrated circuits (ASICs). Tan also noted that these TPUs under the Club name are used by others, including Apple, Cohere and SSI, adding that “the scale at which we see this happening could be significant.” TPUs, or tensor processing units, are the chips that Google designed together with Broadcom. On the “what have you done for me lately” topic, Tan also noted that privately held company Anthropic doubled its size in the reported quarter and placed an additional $11 billion in orders for delivery in late 2026. If that wasn’t enough, Tan said Broadcom has received an initial $1 billion order from a yet-to-be-named fifth XPU customer, also for delivery in 2026. However, in the meeting, there may be margin pressure in the back half of fiscal 2026. CFO Kirsten Spears said: “[In] The situation becomes clearer in the second half of the year, when we start shipping more systems. We will go through more components that are not ours. … These costs will be transferred to more costs on the shelf. And so gross margins will be lower.” Which brings us back to the question: Why did a stock that initially jumped over 3% give up gains and tumble 4.5% in the after-hours session? This relates to concerns about the long-term partnership between Broadcom and Google parent Alphabet, and perhaps back-half margin talk. The Q&A portion of the call began with a question about XPU customers possibly looking to bring in more. Tan responded by discussing the benefits of custom semiconductors, and to the point He noted that it may be possible to code designed hardware only through software along with other solutions. And in fact, since silicon technology is constantly updated, it continues to evolve. [large language model] Gamer, where do you put your resources to compete in this space, especially when at the end of the day you have to compete against commercial GPUs whose development rate is not slowing down? So I view the concept of customer tools as a far-fetched hypothesis, and frankly I don’t think it’s going to happen.” Customer tools refer to the idea that companies are trying to develop their own, in-house designed, custom hardware accelerators for AI training and inference without Broadcom’s help. Tan’s reference to GPUs, or graphics processing units, was intended to highlight the competitive landscape facing customer chips from those gold-standard all-purpose chips dominated by the Nvidia Club. Stock sellers may have taken it. Tan’s words were a bit dismissive, and the concrete “it’s not happening” answer they were hoping for. However, regardless of what Wall Street thinks it wants to hear, we appreciate this hypothesis being nothing more than speculation at the moment, and Tan has made it clear that he doesn’t see this scenario coming to fruition. The potential future downside scenario is an understandable concern that key customers will move development in-house rather than something definitive that will impact Broadcom’s business outlook; after all, we’ve seen those with the financial ability to do so try to move more chip development in-house. right now this is nothing more than speculation and given the strong demand that Broadcom is seeing right now and clearly expects to see an increase as we move forward, in our view, it’s not nearly enough to get out of our position in 2026. If margin commentary is the reason the stock is falling, this is an opportunity because at the end of the day, more business, even at lower gross margin, means more earnings growth AVGO YTD mountain Broadcom YTD However, as investors sit on big earnings, especially in mid-December and 2026. While we look to take profits before the end, even the possibility of a disruption down the road was enough to spark a decline in the stock, with shares up 75% year to date as of Thursday’s close and trading around all-time highs. Out of respect for this year’s rally, we reiterate that we maintain a 2 rating on Broadcom shares and will look for a better opportunity to upgrade it to our buy equivalent rating of 1 if this sell-off continues in the coming sessions. Wednesday’s record close of nearly $413 rose from our previous PT Segment commentary, rising 34.5% year over year to $11.07 billion in the much larger of the two operating segments, with AI semiconductor revenue rising 74% year over year to $6.5 billion year over year, above the $6.22 billion the team had targeted months ago following its fiscal quarter launch, according to Tan. The CEO noted that Tomahawk 6, which he sees as unique in its capabilities, is taking bookings at record rates by adding other components needed to build an AI data center, including XPUs, and Broadcom is looking at more than $73 billion in AI-related backlog — about $53 billion of which is in XPUs. Tan expects the team to turn this into real revenue in the next 18 months, with a fiscal quarter of $4.6 billion. revenue represents a 2% increase from the previous year, a 16% sequential increase “due to positive wireless seasonality,” Tan said, adding that broadband revenue continued to recover, while wireless was flat from the previous year, and the business was under pressure as “spending continues to show limited signs of recovery,” according to FactSet. dollar. Tan said: “4. Bookings remained strong, with total contract value booked in the quarter exceeding $10.4 billion, compared to $8.2 billion a year earlier.” As a result, software infrastructure backlog ended the quarter at $73 billion, a huge increase from $49 billion a year ago. This target is expected to be ahead of the LSEG consensus of $18.27 billion. More importantly, AI revenue is expected to continue growing in the coming quarter; Tan said, “We see the momentum continuing in the first quarter, and the AI half We expect conductor revenue to double year over year to $8.2 billion, driven by custom AI accelerators and Ethernet AI switches.” About $12.3 billion, well above the $11.53 billion consensus estimate, according to FactSet, but Infrastructure Software revenue guidance of $6.8 billion for the fiscal quarter fell short of FactSet’s estimates of $7.136 billion. The company reported adjusted EBITDA for the fiscal quarter, It expects a 66% margin and $12.78 billion in projected revenue, above consensus of $12.06 billion, according to FactSet. waits 45 minutes before buying or selling the stock. THE ABOVE INVESTMENT CLUB INFORMATION, WITH THE ABOVE DISCLAIMERS, MAKES NO OBLIGATION OR DUTY TO SATISFY OR RESULT FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN THIS MATTER. 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