Why Broadcom (AVGO) Stock Dropped 6% Despite Crushing Earnings and AI Revenue Surge

Key Takeaways

• Broadcom’s Q2 adjusted earnings per share reached $2.44, surpassing analyst expectations of $2.40, while revenue climbed 48% to $22.19 billion
• The company generated $10.8 billion from AI-related products in Q2, marking a 143% increase compared to last year
• Shares declined 6.1% in extended trading as forward guidance underwhelmed market expectations
• Third-quarter revenue forecast of $29.4 billion exceeded Wall Street’s $28.25 billion estimate, but the margin wasn’t convincing enough
• CEO Hock Tan anticipates AI semiconductor sales will surpass $16 billion in Q3, representing growth above 200% year-over-year

Broadcom (AVGO) unveiled impressive quarterly figures on Wednesday, yet the market response was underwhelming. Shares tumbled 6.1% during after-hours trading following a regular session that saw the stock dip 0.5% to close at $479.23.

Broadcom Inc., AVGO

The financial performance appeared solid at first glance. Adjusted earnings per share landed at $2.44, topping the $2.40 consensus forecast from analysts. Total revenue expanded 48% from the prior-year period to reach $22.19 billion, slightly exceeding the $22.13 billion projection.

Artificial intelligence revenue stole the spotlight. The company generated $10.8 billion from AI-related products during the quarter ending May 3, representing a 143% jump from the corresponding quarter last year. This figure also exceeded Broadcom’s internal projections.

The semiconductor solutions division generated $15 billion during the quarter, marking a 79% year-over-year increase and surpassing the analyst consensus of $14.72 billion. Meanwhile, infrastructure software contributed $7.2 billion, reflecting 9% growth.

Free cash flow totaled $10.3 billion, accounting for 46% of total revenue. Cash holdings climbed to $19.6 billion at quarter-end, up from $14.2 billion in the previous quarter.

Forward Outlook Falls Short Despite Revenue Beat

Looking ahead to Q3, Broadcom projected revenue of approximately $29.4 billion — representing roughly 84% year-over-year expansion. While this exceeded the Street’s $28.25 billion forecast, the market had anticipated a more substantial figure.

CEO Hock Tan indicated that AI semiconductor revenue should expand more than 200% year-over-year during Q3, hitting $16 billion. “The momentum continues,” he stated in the company’s earnings announcement.

Market participants likely expected a more significant guidance increase given the accelerating growth trajectory already underway.

The stock had advanced 4.7% on Tuesday following Alphabet’s disclosure of plans to raise $80 billion in equity financing for AI infrastructure investments. Broadcom manufactures custom AI processors for Alphabet, including eight iterations of Google’s Tensor Processing Unit. This partnership spans a decade.

Currently, Broadcom develops customized AI chips for six major customers, including Alphabet and OpenAI. The company aims to reach $100 billion in AI chip revenue by 2027.

Software Division’s Share of Revenue Shrinking

Broadcom’s software business, assembled through strategic acquisitions prior to the AI explosion, was designed to balance out the cyclical semiconductor market. Last year, software represented 42% of overall revenue. By next year, that proportion is projected to decline to approximately 20% as AI chip sales accelerate dramatically.

Analysts continue to forecast around 11% revenue growth for the software segment in Q2.

HSBC recently upgraded its price target for Broadcom from $450 to $600 while maintaining a Buy recommendation. The firm pointed to anticipated ASIC revenue expansion in the latter half of fiscal 2026, fueled by partnerships with Google, Meta, Anthropic, and OpenAI.

Broadcom also announced a quarterly dividend of $0.65 per share, with payment scheduled for June 30, 2026. The company has increased its dividend payout for 16 straight years.

The stock maintains a market capitalization of $2.29 trillion. According to InvestingPro analysis, the shares appear overvalued compared to Fair Value calculations.