Summary of Key Points
Broadcom's Q3 financial report generally met market expectations, but it hides several concerns: The AI business has shown impressive short-term growth (exceeding expectations), yet the revenue forecast for the next two years is lower than what the market anticipated; gross margins have declined due to the increasing proportion of custom chips, which poses long-term pressure; the company also faces threats from Google looking for alternative supply chains and competitors poaching orders; additionally, revenue growth from cutting-edge clients such as Anthropic has slowed down, adding uncertainty to future orders. These factors have led to diminished market confidence and a suppressed valuation.
Detailed Analysis
1. AI Business: Short-term “Exceeding Expectations,” but Long-term Guidance is “Conservative”
Broadcom's AI revenue for this quarter was $16.7 billion, up $5.9 billion from the previous quarter and exceeding the market's forecast of $16 billion—mainly due to large shipments of TPUv7 chips to Google and Anthropic. Revenue for the next quarter is expected to be $21.7 billion, also slightly above market expectations ($21.5 billion), indicating a positive short-term trend. However, the market is more concerned about the long-term outlook: The company's forecast for AI revenue in 2027 is $115 billion, while institutions generally expect it to be between $130 billion and $150 billion, which is significantly lower. The $23 billion target for 2028 includes 10 GW of computing power from Anthropic, but given the recent slowdown in Anthropic's annual recurring revenue (ARR) growth, the market doubts the feasibility of this portion of the orders.
2. Gross Margin: Rising Proportion of Custom Chips Constricts Profit Margins
The adjusted gross margin for this quarter was 74%, down 2 percentage points from the previous quarter. The reason is simple: the proportion of custom ASIC chips (chips designed for specific clients and not interchangeable with others) is increasing, and these chips have much lower margins than general-purpose chips. As the AI business continues to rely more on custom chips, gross margins are likely to decline, limiting profit growth.
3. Competitive Landscape: Shifting from “Challenging Nvidia” to “Being Challenged”
Previously, Broadcom and Google collaborated on TPU chips, competing with Nvidia for market share in the AI sector. Now, Google is seeking alternative suppliers: the next generation of TPUv8 chips will be available in two versions, with MediaTek (MTK) also participating in the supply. This means Broadcom's share of Google's orders could be at risk, shifting market focus from whether Broadcom can beat Nvidia to whether it can retain its existing clients.
4. Risks with Cutting-edge Clients: Unstable Revenue from Anthropic and Others
Broadcom's major clients include leading AI research institutions like Anthropic and OpenAI, but their revenue growth (ARR) has slowed down. Moreover, Broadcom collaborates with financing platforms to fund the purchase of chips for these clients, but these custom chips are not interchangeable. If these clients' revenue declines, the financing platforms may stop funding, potentially jeopardizing the $20 GW of computing power orders.
5. Software Business: Merger Benefits Waning; Subscription Model Needed for Sustainable Growth
Infrastructure software revenue for this quarter was $8.75 billion, up 29% year-over-year, mainly due to the integration and transition to a subscription-based model following the acquisition of VMware. The impact of the merger has worn off, and future growth will depend on the increase in VMware's subscription users. While this segment is stable, it is unlikely to drive explosive growth and can only serve as a stabilizer for Broadcom's performance.
Conclusion
Broadcom's Q3 financial results are decent on a short-term basis, but there are many long-term concerns: conservative guidance, declining margins, intensified competition, and client risks. Without addressing these issues, the market is unlikely to assign a high valuation to the company. In short, Broadcom is in a challenging position, with Nvidia blocking its path ahead, competitors like MediaTek and Marvell closing in from behind, and its existing clients being unstable.