Summary of Key Highlights
Broadcom's financial report for the second quarter of fiscal year 2026 was truly impressive: total revenue reached a record high of $22.19 billion (a 48% year-on-year increase), AI semiconductor revenue doubled to $10.8 billion (a 143% increase), profits soared (net profit increased by 88%), and there is an order backlog of over $90 billion, extending into 2028. However, the company's third-quarter AI revenue forecast of $16 billion fell short of analysts' most optimistic estimates ($17-17.5 billion), and the forecast for 2027's AI revenue remained at $10 billion (while the market expected it to be between $12-13 billion), causing the stock price to plummet by 12.59%. The fundamental issue was a discrepancy between the market's overly aggressive expectations and Broadcom's more conservative approach. Given that the stock price had already doubled in the past year, investors were expecting even better performance, but Broadcom failed to meet these expectations, leading to capital outflows.
I. Highlights of the Financial Report: Profitability on an "Amazing" Level
Broadcom's performance this quarter can be described as effortlessly generating substantial profits:
- AI Business Becomes the Main Driver: AI semiconductor revenue accounted for nearly half of total revenue (49%), with a 143% year-on-year increase. Customers were eager to place orders, resulting in an additional $30 billion in new business, although only $10.8 billion was actually delivered; the order backlog exceeds $90 billion, indicating that customers are willing to pay in advance and wait for their data centers to be built and power supplies to be installed (similar to a "prepayment queue").
- High Quality of Profits: Free cash flow accounted for 46% of revenue, meaning that 46% of every $100 earned was actually put into the company's pocket. The operating margin reached a record high of 67%. Although the gross margin decreased by 2.3 percentage points, this was not due to poor business performance: firstly, the proportion of semiconductor sales increased (semiconductor gross margins are lower than those of software, which account for 93% of total revenue); secondly, the gross margins on custom ASICs used in AI applications were lower than those on networking chips. However, with the expansion of business volume, fixed costs were spread over a larger base, resulting in higher overall profits.
- Non-AI Business is Also Recovering: Non-AI semiconductor revenue was $4.2 billion (a 6% year-on-year increase), and it is expected to grow by another 12% in the third quarter. This stable segment serves as a foundation for the company's growth during industry downturns.
II. The Reason for the Stock Price Drop: A Discrepancy between Expectations
Despite the strong financial results, the stock price fell because the market's expectations were not met:
1. Short-Term Guidance Was Not Aggressive Enough: The third-quarter AI revenue forecast of $16 billion represented a 200% year-on-year increase, but analysts' most optimistic estimates were between $17-17.5 billion, indicating a shortfall of $5-10 billion. With the stock price already doubling, meeting these expectations was considered underwhelming.
2. Lack of an Upgrade in Long-Term Goals: Broadcom's target for 2027's AI revenue remained at $10 billion, while the market expected it to increase to between $12-13 billion. The company's CEO suggested that performance could be even better but did not raise these targets, which disappointed more aggressive investors.
3. Business Model Questioned: While competitors like NVIDIA and AMD also manufacture complete systems (from chips to data centers), Broadcom focuses solely on selling chips. Some investors viewed this as a limitation, suggesting that the company is missing out on potential higher profits by not diversifying its offerings.
4. Profit Realization: The stock price had reached a record high before the report was released, leading some investors to sell their shares, exacerbating the decline.
III. Broadcom's Strong Position in the AI Field: Unrivaled Competitiveness
Broadcom's success in the AI chip market is due to three key advantages:
- Order Lockups Until 2028: Six major customers (including Google, Meta, and OpenAI) have committed to deploying over 10 GW of computing power in 2027-2028, providing stable revenue streams. The combination of chip sales and related networking equipment helps to mitigate fluctuations in demand.
- Priority Access to Production Capacity: As one of TSMC's largest customers for over a decade, Broadcom has secured advanced manufacturing capacity for 2026-2027, which other companies cannot obtain. The company is even planning for 2028.
- High Customer Trust: Custom chip development requires long-term collaboration, and Broadcom has built a strong relationship with Google, Meta, and others, making it difficult for them to switch to competitors.
IV. Potential Concerns: Could Market Share Be Affected by Customers Seeking Alternative Suppliers?
In the long term, Broadcom faces the challenge of customers diversifying their supply chains. For example, Google has moved some of its TPU orders to MediaTek, and Meta and Microsoft have other suppliers as well. Investment banks predict that Broadcom's market share in Google's TPU business could decline from 95% in 2026 to 65% in 2028. However, this impact is likely to be minor since orders are already placed through 2028, and customers will not immediately switch suppliers.
V. The AI Computing Power Financing Platform: Going Beyond Chip Sales
Broadcom has partnered with Blackstone and Apollo to launch the $350 million "AI XPV Platform," aiming to deploy 20 GW of computing power by 2028. This initiative is strategically smart:
- AI companies require significant funding to purchase computing power, and Broadcom, in collaboration with investors, helps them solve this financial issue while securing additional chip orders.
- It represents a shift from simply selling chips to providing a comprehensive solution that includes financing services, further strengthening its relationship with customers. If customers lack the funds to buy chips, Broadcom can help them secure the necessary funding and still ensure they use its products.
Conclusion
Broadcom's recent stock price drop was not due to a deterioration in its fundamentals but rather because market expectations were excessively high. The company retains all its key strengths (orders, production capacity, and customer base), indicating strong long-term growth potential. It's like a top student who scored 95 out of 100 but was criticized for not meeting higher expectations; however, the student is still outstanding, and this short-term fluctuation in stock price is just temporary. For investors, this could be an opportunity to buy into Broadcom's shares.