AVGO stock slid around 4.4% in pre-market trading right now after Broadcom’s CFO warned that gross margins would actually drop by 100 basis points in Q1, and this overshadowed the strong Broadcom AI revenue growth along with Broadcom earnings that beat estimates. The AI semiconductor demand drove Q4 revenue to $18.02B, yet AVGO margin pressure from lower-margin system sales was cited as the main trigger for the selloff. AVGO stock had closed at $406.37 the previous day.
Broadcom AI Revenue Meets Rising AVGO Margin Pressure And Earnings Risk
Strong Earnings Can’t Offset Profitability Concerns
Broadcom earnings actually delivered some solid numbers with Q4 revenue hitting $18.02B against the $17.49B estimate, and adjusted EPS of $1.95 beating the $1.87 consensus. CEO Hock Tan guided Q1 revenue to $19.1B, which came in well above the Street’s $18.27B estimate, and he also projected that AI chip sales would double to $8.2B next quarter.
CFO Kirsten Spears stated:
“In fiscal year 2024 adjusted EBITDA increased 37% year-over-year to a record $31.9 billion, and free cash flow excluding restructuring was strong at $21.9 billion.”
However, analysts cited the CFO’s margin warning as the primary driver behind AVGO stock’s decline at the time of writing. The higher mix of Broadcom AI revenue, particularly from lower-margin system sales in the $73B backlog, will pressure profitability through the second half of fiscal 2026. Some analysts flagged that AVGO margin pressure could become an even bigger concern as system sales make up a larger portion of revenue. Shares of AVGO stock tumbled as much as 9% in after-hours trading before stabilizing.
Customer Concentration Risk Persists
Tan confirmed Anthropic as the fourth customer and revealed the AI startup placed an additional $11B order for late 2026 delivery. A fifth customer also emerged with a $1B order, yet AI semiconductor demand remains concentrated across just five hyperscalers right now.
Kirsten Spears had this to say:
“[In] the second half of the year, when we do start shipping more systems, the situation is straightforward.”
Such a small customer base also poses certain risks, in case any of the key customers diminishes the orders which, along with a concern about AVGO margin pressure and profitability in the future despite high visibility of revenue, contribute to the risk of low future profits. The focus ensures that AVGO stock performance is highly dependent on few hyperscaler orders and any change in their spending habits would severely affect Broadcom earnings. The sheer number of customers creating even with the huge backlog makes AI semiconductor sales focused on such a small number of customers, poses an execution risk that investors are considering weighed against the AVGO stock growth narrative in the future.
