Markets brace for Broadcom earnings as investors rationalize AI spending

Broadcom Inc. is set to report earnings on Thursday, and all eyes will be on the numbers. This year, the chipmaker has been a major beneficiary of the artificial intelligence (AI) boom.

Since April, the firm’s stock has doubled, adding over $730 billion in market value, making it one of the top performers in the Nasdaq 100 Index. But the meteoric rise raises a key question: How much further can the stock climb? Investors worry that even strong results may fall short of expectations after such a massive rally.

Their caution is understandable. Recent earnings from Nvidia and Marvell show that strong reports don’t guarantee market approval. Nvidia shares dropped more than 6% despite a revenue outlook in line with expectations, while Marvell plunged nearly 20% on weaker-than-expected data center sales. These reactions have sparked concerns that Broadcom could face a “sell the news” scenario.

Nvidia’s report has already knocked 4% off the Philadelphia Semiconductor Index, whereas the broader Nasdaq 100 is less than 1% lower. It’s an example of how brittle investor sentiment has become regarding chip stocks.

Broadcom rides the AI surge 

Broadcom is poised to report what are likely to be strong numbers in its latest earnings release and has a history of impressive results. Analysts estimate adjusted earnings per share will increase 34% from a year ago, to around $1.67, with revenue growing 21% to $15.8 billion.

The obvious driver is artificial intelligence. Analysts predict that AI sales could reach $5.1 billion this quarter. That would represent almost one-third of Broadcom’s overall revenue and a 60% rise from the previous year. That growth highlights how AI has rapidly become a bedrock of Broadcom’s business model.

Broadcom’s custom-designed chips, called ASICs (application-specific integrated circuits), are at the heart of this expansion. Unlike general-purpose processors, ASICs are engineered to handle specific tasks with maximum efficiency.

Instead of isolating them in remote facilities, big cloud operators like Google, Amazon, and Microsoft use such chips to freshen up their enormous data centers, spitting out everything from search and streaming to generative AI platforms like ChatGPT.

These alliances with hyperscalers place Broadcom among the handful of companies able to capitalize on the infrastructure arms race to power AI. Analysts note that demand from cloud providers has been so strong that Broadcom’s backlog for custom chips stretches well into 2025. That visibility inspires more confidence among investors that the company’s growth will last.

Apart from hardware, Broadcom is also pushing into software diversification with VMware, which it bought in 2023. Cloud management software, virtualization technology, and subscriptions are recurring revenue streams that VMware will boost. This mix of hardware and software is considered a stabilizing force, in particular when sales of chips experience cyclical swings.

Broadcom faces risks and client pushback amid AI expansion

Melius Research raised its target to $335 and deemed Broadcom a “must-own” AI stock. These targets give a sense of the belief that the firm has plenty more room to keep rising, even after its monstrous rally.

But the risks are clear. Building custom chips is costly, and they can’t always outperform the powerful GPUs from Nvidia. Competition is heating up as other companies rush to develop AI hardware. Broadcom also has exposure to geopolitical risks, with about 20% of its revenue derived from China. Additional trade barriers or geopolitical tensions may dampen results.

The firm is also facing client pushback over major changes to VMware’s licensing model as it shifts focus toward AI. As earlier reported by Cryptopolitan, the company first provided clients with access to thousands of products to manage data centers when it bought VMware for $69 billion in 2023. However, the company quickly winnowed that line up to five.

Broadcom CEO Hock Tan explained that the original plan was to reduce VMware’s offerings to four products. However, persistent client objections led the company to retain a fifth option.

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