Broadcom’s Stock Swings: A Tale of Record Results and Market Jitters

Mid-December saw Broadcom unveil a set of financial results that appeared stellar at first glance, featuring record revenue and explosive growth in artificial intelligence. Yet, in a surprising twist, the initial market response was a sharp sell-off. Only in subsequent days did the shares stage a remarkable rebound. This volatility highlights a market grappling with both the company's formidable fundamentals and lingering concerns over its guidance and valuation.

The semiconductor behemoth posted outstanding figures for its fiscal fourth quarter. Net revenue surged by 28% year-over-year to $18 billion. This growth was largely fueled by a staggering 74% increase in AI semiconductor revenue, which reached $6.5 billion. The company also surpassed analyst expectations, reporting adjusted earnings per share of $1.95.

Despite these powerful numbers, the stock came under significant pressure immediately following the report. Market observers noted a clear disconnect between the robust financial performance and the nervous reaction from investors, which drove the share price down before the recent recovery took hold. By the week's end, shares were trading at $352.13, marking an impressive 7-day gain of over 21%.

Analysts point to several specific factors behind the initial investor skepticism:

Should investors sell immediately? Or is it worth buying Broadcom?

• AI Backlog Scrutiny: While massive at $73 billion, the AI-related order backlog fell short of the sky-high expectations held by some market participants.
• Shifting Margin Profile: Management forecast a 100-basis-point contraction in gross margin, attributed to a changing revenue mix that includes a higher proportion of AI hardware and lower-margin rack-scale solutions.
• Software Slowdown: Growth in the infrastructure software segment is projected to decelerate to the low double-digits. The outlook for the first quarter suggests a mere 2% year-over-year increase in this division.

Unwavering Confidence in the AI Trajectory

Setting aside near-term concerns, CEO Hock Tan provided an optimistic forecast for the first quarter of fiscal 2026. The company anticipates total revenue of $19.1 billion, with AI semiconductor revenue expected to double to $8.2 billion.

Broadcom continues to solidify its position with major technology "hyperscalers." In addition to established clients like Google and Meta, the company has secured a fifth customer for its custom AI accelerators (XPUs), which has already placed initial orders worth $1 billion. A renewed partnership agreement with OpenAI was also confirmed, although significant revenue from this collaboration is not expected until after 2026.

Valuation and Shareholder Returns

In a show of confidence, Broadcom's board raised its quarterly dividend by 10% to $0.65 per share. This marks the fifteenth consecutive annual increase. The decision is backed by a robust free cash flow, which jumped 36% in the last quarter to $7.5 billion.

The valuation remains ambitious, with a market capitalization of approximately $1.7 trillion and a price-to-sales multiple of 26. However, analysts see further potential. The median price target sits around $457, implying additional upside from current levels given the recent positive price momentum.