Despite delivering robust quarterly results and raising its future growth outlook, Broadcom (AVGO.US) faced a sell-off from investors on Thursday after it did not further increase its full-year revenue forecast for its artificial intelligence (AI) business. At the time of writing, its shares were down over 13% to $411.91, dragging down the broader semiconductor sector.
The decline in Broadcom shares put pressure on other chip stocks, including NVIDIA (NVDA.US), Advanced Micro Devices (AMD.US), and Intel (INTC.US). Market concerns primarily stemmed from the company's management not raising its full-year AI-related revenue guidance. Following the AI fervor of the past two years, investor expectations for AI-focused stocks have significantly increased, and any sign that growth expectations are not being further elevated can trigger profit-taking.
Wall Street's Contrary View
However, several Wall Street institutions believe the market reaction may be overly pessimistic.
Bernstein analyst Stacy Rasgon pointed out that AI business revenue is inherently volatile, and data from a single quarter does not fully reflect the long-term trend. He noted that Broadcom still expects AI-related revenue to grow approximately 200% year-over-year next quarter, and by fiscal year 2027 its AI semiconductor business revenue is projected to exceed $100 billion, a growth rate that remains exceptionally strong.
Rasgon believes that as several major projects move into volume production, growth momentum will further strengthen in the second half of 2027 and is expected to establish a higher revenue run-rate for 2028. Simultaneously, the software business and other non-AI semiconductor segments will continue to provide stable growth support.
Addressing some investor concerns that the expansion of the AI-specific Application-Specific Integrated Circuit (ASIC) business might compress gross margins, Rasgon stated that while gross margins have slightly declined, operating leverage has effectively offset this impact. "For a company still maintaining gross margins above 70%, complaining about a dip in margins seems somewhat nitpicky," Rasgon said.
Rasgon anticipates that Broadcom's stock may enter a consolidation phase over the next one or two quarters, but as market focus shifts to 2027, the company's growth narrative will regain attention. He highlighted that Broadcom currently shows revenue and earnings per share growth rates exceeding 50%, with gross and operating margins maintained above 70% and 60% respectively, while its valuation is only at a low-teens forward price-to-earnings multiple.
Based on this assessment, Bernstein maintained its "Outperform" rating on Broadcom and raised its price target from $525 to $550.
Analysts Highlight Long-Term Optimism
Goldman Sachs analyst James Schneider stated that following the significant stock price pullback, he is inclined to be an aggressive buyer of Broadcom shares. He cited three primary reasons for maintaining optimism about the company's growth prospects for 2027 and beyond.
Firstly, the company still expects fiscal 2027 AI semiconductor revenue to significantly surpass $100 billion, corresponding to a deployment scale of about 10 gigawatts in data centers. Secondly, management provided further updates on the progress of multiple custom chip customer projects beyond Google, which are expected to see strong growth in fiscal 2027. Thirdly, the company reaffirmed it has secured the supply of key components necessary to support revenue growth for the coming years and will not be affected by supply chain bottlenecks.
Schneider maintained a "Buy" rating and raised his price target from $500 to $525.
Beyond Goldman Sachs and Bernstein, several other investment banks also expressed positive views. KeyBanc Capital raised its price target for Broadcom from $500 to $575; Mizuho Securities raised its target from $480 to $530.
However, some institutions have adopted a more cautious stance. Macquarie downgraded its rating on Broadcom from "Outperform" to "Neutral" and assigned a price target of $437.