AVGO posted blowout quarterly results driven by booming AI chip demand, but cautious forward guidance triggered steep after-hours selloff
Broadcom (AVGO), a top beneficiary of global AI infrastructure expansion, delivered a stellar set of financial results for its fiscal second quarter ending May 3, comfortably topping Wall Street’s consensus earnings estimates across core metrics. However, robust quarterly performance failed to lift market sentiment, with the stock slumping more than 12% in after-hours trading as investors dialed back lofty growth expectations on the back of conservative third-quarter AI sales outlooks.
For the three-month period ended May 3, the chip giant logged total revenue of $22.2 billion, marking a 48% year-over-year jump that accelerated sharply from the 29% revenue growth registered in the prior quarter. Adjusted earnings per share came in at $2.44, representing a 54% annual increase. Both readings outperformed analyst consensus forecasts calling for $22.12 billion in top-line revenue and $2.40 per share in adjusted EPS. Fueling the outstanding print was the firm’s core AI semiconductor division, whose quarterly revenue hit $10.8 billion, skyrocketing 143% from the same period a year earlier. The segment has now secured positive revenue expansion for 13 consecutive quarters, fueled by robust enterprise appetite for custom AI accelerators and AI networking hardware.
The company generated solid cash generation during the quarter, posting operating cash flow of $10.49 billion and free cash flow totaling $10.26 billion. Broadcom also announced a regular quarterly cash dividend of $0.65 per share, set for payment on June 30 to shareholders of record as of June 22. With a dividend payout ratio standing at 55%, analysts note meaningful room for future dividend hikes down the line.
Breaking down operating segments, Broadcom’s Semiconductor Solutions division contributed $15.009 billion in revenue, up 79% year over year and accounting for 68% of total quarterly sales. Its Infrastructure Software business, largely built via the VMware acquisition, registered $7.178 billion in revenue with a modest 9% annual rise, making up the remaining 32% of total revenue; sluggish software growth lagged the explosive expansion seen across the chip arm. Unlike Nvidia’s all-purpose GPUs, Broadcom specializes in bespoke ASIC chips optimized for dedicated computing workloads, delivering cost and efficiency perks for targeted data center operations. Custom chip orders from six marquee clients including Alphabet, Meta, OpenAI and Anthropic anchor the segment’s rapid expansion. Alphabet’s decision to bump its annual capital expenditure budget to $190 billion further underpins long-term order visibility for Broadcom’s custom silicon products.
While Broadcom’s projected Q3 total revenue of $29.4 billion, an 84% yearly increase, sits above the Street’s consensus of $28.47 billion, its third-quarter AI semiconductor revenue guidance of $16 billion fell short of analysts’ average projection of $17.2 billion, even with a projected annual growth rate exceeding 200%. Compounding investor disappointment, management opted to stick with its existing full-year AI chip revenue target above $100 billion instead of lifting the forecast amid prevailing industry strength, serving as the primary catalyst behind post-earnings share declines.
Valuation dynamics amplified near-term selling pressure. Ahead of earnings release, Broadcom’s stock had rallied 93% over the trailing 12 months, lifting market optimism to extreme levels and pushing its forward P/E multiple to 42 times earnings. Despite an attractive PEG ratio of 0.63 signaling undervaluation when accounting for the firm’s outsized growth trajectory, the stock had already priced in excessive bullishness around AI upside. Disappointing forward guidance triggered a rush of profit-taking among investors who had piled into shares during the preceding rally.
Industry advisory firm Futurum Group downplayed the pullback’s implications for Broadcom’s core fundamentals, arguing the share drop reflects nothing more than a market reset of inflated growth expectations rather than a deterioration in the company’s long-term AI story. The chipmaker maintains its plan to ship 10 gigawatts of AI compute capacity, with additional capacity expansions slated for 2028 against a backdrop of persistently accelerating global AI compute demand. Executives reaffirmed during the earnings call that robust AI revenue expansion will persist into fiscal 2027 and kept the full-year $100 billion AI sales target unchanged.
Though near-term sentiment remains pressured as markets digest revised growth expectations and pare stretched valuations, Broadcom’s fundamental backdrop stays intact, underpinned by 13 straight quarters of triple-digit-percentage AI revenue growth and long-term supply agreements with the world’s leading AI developers. The recent stock pullback largely serves to deflate excessive valuation premiums accumulated during the prior run-up, with sustained global AI data center buildout set to continue supporting the firm’s earnings growth over the long haul.
