Broadcom (AVGO) shares fell roughly 15% in the session following its fiscal second-quarter results, one of the sharpest single-day percentage declines the stock has seen, yet the results themselves were strong across every meaningful metric.
Profit, cash flow, and AI sales all hit records, which makes this look far more like a reset of inflated expectations than any crack in the underlying business.
Revenue reached $22.19 billion for the quarter, up 48% year-on-year, with adjusted EBITDA of $15.24 billion representing 69% of revenue and free cash flow of $10.26 billion. The market’s reaction had almost nothing to do with what Broadcom actually delivered.
The selloff came down to two things: Q3 AI chip revenue guidance of $16 billion fell slightly short of analyst expectations of roughly $16.4 billion, and CEO Hock Tan declined to raise the company’s full-year AI semiconductor target, reaffirming but not upgrading the $100 billion benchmark for fiscal 2027.
When a stock has gained close to 40% year-to-date and added hundreds of billions in market cap in the days before an earnings print, the bar does not merely need to be cleared. Broadcom cleared it, and that was not enough.
AI Semiconductor Growth Remains the Core Story
The $16 billion Q3 AI guide that disappointed analysts would still represent a tripling of the figure from a year earlier, with the company expecting AI semiconductor revenue to reach $56 billion for the full year, up approximately 180% from fiscal 2025. This is not a deteriorating story.
The custom chip business is the engine here, and it is becoming structurally significant across the technology sector. Broadcom designs purpose-built chips for each hyperscaler’s specific workload, making switching costly and customer relationships stickier.
The company says it is working with six core AI customers, including Alphabet, Meta, Anthropic and OpenAI, across various stages of development and deployment. Custom AI chips are gaining traction because they are typically more cost-effective for training and inference than general-purpose GPUs, which positions Broadcom as a structural beneficiary of hyperscaler capex rather than a cyclical one.
Valuation Looks More Reasonable After the Pullback
On valuation, the selloff has done some of the re-rating work. Based on current consensus fiscal 2027 earnings estimates, the forward multiple falls to roughly 24 times, which looks considerably more reasonable given the growth trajectory.
The infrastructure software division adds further ballast, with software revenue growing 9% year-on-year in Q2 and further growth expected in Q3, providing a more predictable revenue stream that offsets some of the risk attached to semiconductor capex cycles.
Margin Pressure Remains the Main Risk
Margin compression is the most tangible near-term risk. AI hardware carries lower gross margins than Broadcom’s software and legacy semiconductor products, and as XPU volumes scale, that dilution will continue.
It is a pressure management has acknowledged and one that bulls need to price in honestly rather than wave away.
The analyst community was not shaken by the selloff, with the overwhelming majority of covering analysts maintaining buy or outperform ratings and a consensus 12-month price target implying meaningful upside from current levels. Several raised targets on the day of results.
Broadcom’s Selloff Looks More Like a Reset Than a Breakdown
The bear case rests almost entirely on valuation and the perception that Tan’s refusal to raise the $100 billion AI target signals approaching saturation, but that reading seems premature given supply secured through 2027 and management actively working to extend commitments through 2029.
A 15% selloff following a quarter of record revenue, record operating profit and record free cash flow, triggered primarily by a guidance figure that missed consensus by less than 3%, represents the kind of reset that offers a more considered entry into a structurally well-positioned business.
The shares appear more attractively valued today than they did on Wednesday morning.
