Broadcom's stock cools off even as earnings show robust AI demand

Broadcom reported strong Q2 earnings with revenue of $15.0 billion, up 20% year-over-year, and adjusted EPS of $1.58, slightly exceeding expectations; Q3 guidance was set at $15.8 billion, above the $15.7 billion consensus. AI revenue grew 46% year-over-year to $4.4 billion, with expectations for acceleration in the current quarter to $5.1 billion, driven by hyperscale partner investments. Despite the positive results and outlook, Broadcom's stock fell 3% in after-hours trading, potentially due to profit-taking after a substantial rally.

Analysis

Broadcom Inc. reported fiscal second-quarter results demonstrating sustained momentum, particularly within its artificial intelligence operations, although its stock saw a modest retreat in after-hours trading. The company achieved record Q2 revenue of $15.0 billion, marking a 20% year-over-year increase and aligning with FactSet consensus, while adjusted earnings per share reached $1.58, narrowly exceeding analyst expectations by one cent. Broadcom's guidance for July-quarter revenue is $15.8 billion, slightly ahead of the $15.7 billion consensus, indicating continued growth. A significant highlight was AI revenue, which grew 46% year-over-year in the April quarter to over $4.4 billion; CEO Hock Tan anticipates this will accelerate to $5.1 billion in the current quarter, representing the tenth consecutive quarter of growth driven by hyperscale partner investments. The integration of VMware also contributed positively to overall performance. Despite these strong operational metrics and a positive outlook, Broadcom shares declined 3% in extended trading, a reaction potentially linked to profit-taking following the stock's substantial 78% rally from its April closing low. Analyst sentiment remains supportive, with Melius Research designating Broadcom as a "must-own" AI stock, citing its strong position among fabless chip providers, its expanding switching business (which constitutes about 30% of its AI revenue), and its unique capacity to deliver both high-performance and cost-effective AI chip solutions, alongside expected profit enhancement from VMware. Investor attention is particularly focused on forthcoming details regarding near-term demand for custom silicon, the progress of Google’s next-generation v6 and v7p tensor processing units, and specifics on engagements with four major custom-silicon clients.

Key Decisions for Investors

• Given the robust AI-driven revenue growth and slightly better-than-expected forward guidance, investors might consider the after-hours stock dip as a potential entry point for long-term positions focused on the AI infrastructure build-out.
• Investors should closely monitor company communications for updates on custom silicon customer ramps, especially concerning the four new large customers and Google's TPU developments, as these are key catalysts for sustaining AI-related growth.
• While underlying AI fundamentals appear strong, the significant prior stock appreciation suggests high expectations are priced in, meaning sustained outperformance in AI revenue and margins will be crucial to support current valuation levels and mitigate potential volatility.