Broadcom (AVGO) Stock Dips Despite Massive 221% AI Revenue Growth in Q3 Earnings

Key Takeaways

• Broadcom’s Q3 revenue jumped 86% year-over-year to $29.59 billion, surpassing analyst expectations of $29.43 billion
• AI-focused chip sales exploded 221% to reach $16.7 billion, with Q4 projected to climb to $21.7 billion (236% year-over-year increase)
• The company elevated its FY2027 AI chip revenue target to $115 billion and maintained its FY2028 forecast of $230 billion
• Q4 revenue projection of $34.8 billion fell marginally below the $35 billion consensus, triggering a sell-off
• AVGO shares declined approximately 2.2% in Thursday’s premarket session; Wall Street consensus remains Strong Buy with $505.38 average target

Broadcom (AVGO) delivered impressive fiscal third-quarter results Wednesday evening, yet shares retreated nonetheless. AVGO traded down roughly 2.2% in Thursday’s premarket hours, following volatile after-hours movement Wednesday.

Broadcom Inc., AVGO

The core metrics looked robust. Third-quarter revenue totaled $29.59 billion, marking an 86% year-over-year increase and exceeding Wall Street’s $29.43 billion projection. Adjusted earnings per share of $3.32 surpassed analyst forecasts ranging from $3.22 to $3.24, nearly doubling the $1.69 posted last year.

The AI semiconductor segment stole the spotlight. Revenue from AI chips skyrocketed 221% compared to the prior year, reaching $16.7 billion and exceeding both internal projections and analyst consensus. Management forecasts this metric will surge to $21.7 billion in the fourth quarter, translating to 236% annual growth.

Management Elevates Multi-Year AI Projections

The company also upgraded its extended-range forecasts. Broadcom now anticipates $115 billion in AI chip sales for fiscal 2027, an increase from its previous guidance of more than $100 billion. The company then projects that figure will approximately double to roughly $230 billion by fiscal 2028.

Chief Executive Hock Tan noted that current demand levels are exceeding the company’s production capabilities, lending credibility to these ambitious projections.

During the previous quarter, Broadcom maintained its FY2027 AI guidance at $100 billion, which triggered a significant stock decline. This quarter, even with an enhanced outlook, the selling pressure persisted.

The Catalyst Behind the Decline

The culprit was fourth-quarter guidance. Management projects revenue of $34.8 billion, representing 93% year-over-year growth, yet falling marginally below the approximately $35 billion analyst consensus. Adjusted operating margin guidance of 66% also trailed expectations of 66.5%.

This modest shortfall proved sufficient to eclipse the impressive AI performance.

The stock also faces lingering concerns from recent developments. AVGO has retreated approximately 26% from its June all-time peak. A regulatory filing disclosed that Broadcom potentially faces up to $29 billion in lease commitments connected to a data center investment vehicle established by Apollo and Blackstone, raising questions about underlying demand dynamics.

Additionally, in August, Google announced a partnership with Marvell to develop chips for portions of its AI infrastructure. While Broadcom renewed its TPU agreement with Google in April, Marvell will now manage other semiconductor development, potentially constraining Broadcom’s future revenue streams.

Broadcom creates custom AI accelerators for major clients including Google Cloud, Meta Platforms, and OpenAI. Google represents its most significant and longest-standing customer relationship.

For the year-to-date period, AVGO has gained 6.5%. Following the earnings release, Mizuho analyst Vijay Rakesh maintained his Buy rating and $530 price target, forecasting AI revenue reaching $129 billion in FY2027 and $235 billion in FY2028. The consensus analyst price target on TipRanks stands at $505.38, suggesting 37.6% potential upside.

The overall analyst consensus remains Strong Buy, supported by 23 Buy recommendations and three Hold ratings.

Broadcom’s forward price-to-earnings multiple of 18.8x trades slightly above the S&P 500 average, representing a significant contraction from the premium valuation multiples the stock commanded earlier this year.