Broadcom has entered the AI chip business, but investors are nervous about the profitability and cost of the huge investment. Chief Executive Officer Hock Tan said on a post-earnings conference call that the company has a $73 billion backlog and plans to ship over the next 18 months, but he said margins could fall.
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“We expect consolidated gross profit margin to decline approximately 100 basis points sequentially in the first quarter, primarily reflecting a higher proportion of AI revenue,” Kirstin Spears, chief financial officer, said on a conference call. Profit margins are affected throughout the year by the mix of infrastructure, software and semiconductor revenues.
Kingai Chan, senior research analyst at Summit Insights, said Broadcom's concentration of AI customers and lower margins on future sales of AI systems were the driving forces behind the stock's decline.
The backlog “still comes from just five customers and includes some high-priced systems. System sales are expected to have lower gross margins and…become a larger percentage of total sales in future quarters, i.e., the second half of fiscal 2026,” he said.
The decline in gross margins could raise concerns that costs associated with contract chipmaker TSMC will weigh on the value Broadcom can realize from its custom AI processor business, said Gil Luria, an analyst at DA Davidson.
Major US cloud providers are expected to spend more than $400 billion on AI this year to build the data centers needed to support services such as ChatGPT, Copilot, and Gemini.
However, rising spending, limited evidence of real-world AI productivity gains, soaring valuations, and a web of cyclical investments are raising concerns about an AI bubble.
Broadcom's AI semiconductor revenue, which includes both custom and networking chips used in AI data centers, is expected to double to $8.2 billion in the first quarter of its fiscal year, Tan said in a statement.
Broadcom expects quarterly revenue of about $19.1 billion, compared with analysts' average estimate of $18.27 billion, according to data compiled by LSEG.
The company reported revenue of $18.02 billion for the fourth quarter ended Nov. 2, compared to an expected $17.49 billion.
Reporting by Juvie Babu in Mexico City. Editing: Maju Samuel and Alan Barona
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