Broadcom Stock Drops After Strong Earnings -- Time to Buy?

Broadcom shares fell 21% after earnings despite Q2 sales rising 48% year over year to a record $22.2 billion and AI chip revenue jumping 143% to $10.8 billion. The sell-off was driven by softer-than-expected Q3 AI revenue guidance of $16 billion versus $17 billion expected and gross margin guidance of 74% versus 77% in Q2. The article frames the decline as largely valuation- and guidance-driven rather than a fundamental deterioration.

Analysis

The market is treating AVGO less like a compounder and more like a crowded AI beta proxy, which is why a merely “good but not perfect” guide is enough to trigger de-risking. The second-order issue is not the absolute margin level, but the fact that AI mix is becoming the dominant narrative driver just as the stock’s multiple depended on sustained operating leverage; that makes every incremental basis point of margin compression mechanically more important. In other words, the stock is now trading on a very narrow path where revenue beats can be offset by even small signs that AI is dilutive before it becomes accretive.

The selloff also reflects positioning, not just fundamentals. After a large run, systematic and discretionary holders likely became mechanically overweight AVGO within AI baskets, so any guide that lands below the highest whisper number can force reductions across factor products, not just single-name holders. That creates a window where the downside can overshoot the underlying change in intrinsic value for 1-3 weeks, especially if broader AI semis are used as liquid sources of funding.

Contrarianly, the consensus may be over-penalizing near-term margin compression because it assumes the current product mix is the steady state. If AI accelerators remain constrained and AVGO keeps taking share, the near-term margin dilution is a capacity-investment phase, not a structural erosion story. The real question is whether the next two quarters produce evidence that AI gross margin stabilizes while software and infrastructure cash flows remain resilient; if yes, the multiple can re-rate back before year-end.

Relative value still looks better than outright panic. NVDA and AMD benefit if investors rotate within semis toward cleaner AI operating leverage, while INTC remains more of a turnaround beta beneficiary than a direct winner from this read-through. For AVGO itself, the opportunity is likely better expressed after forced selling subsides, because the risk/reward improves once the market stops extrapolating one quarter of margin pressure into a multi-year thesis break.

Key Decisions for Investors

• Wait for AVGO stabilization: buy only if the stock bases for 5-10 trading days above the post-earnings low; otherwise the next leg lower could still be another 5-8% on position unwind risk.
• Relative long NVDA / short AVGO for 2-6 weeks: if investors rotate toward cleaner AI margin expansion, NVDA should outperform AVGO on a multiple basis while AVGO absorbs the “AI at any price” correction.
• Take a tactical long in AMD vs AVGO only on further weakness: AMD has more torque to AI optimism and less crowded ownership, but use a tight stop because it is still sentiment-sensitive.
• Avoid shorting AVGO outright into the first bounce; the better trade is a put spread for 30-60 days if you expect another estimate cut or margin disappointment, with defined downside risk.
• For long-only portfolios, scale into AVGO in thirds over 4-8 weeks rather than all at once; the upside is a normalization back toward prior valuation bands, but the path will likely be volatile and dependent on margin confirmations.