Broadcom (AVGO 1.15%) has turned out to be a solid investment in the past year, as shares of the semiconductor specialist have jumped 52% during this period, owing to its growing influence in the market for artificial intelligence (AI) chips.
However, investors weren't satisfied with Broadcom's latest quarterly report. The stock fell more than 11% after releasing its fiscal 2025 fourth-quarter results (for the quarter ended Nov. 2) on Dec. 11.
Let's see why that was the case, and check if the hit this semiconductor stock has taken going into 2026 will have an impact on its performance in the coming year.
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AI revenue continues to grow at an incredible pace
Broadcom reported fiscal Q4 revenue of a record $18 billion, up by 28% from the year-ago period. Non-GAAP (generally accepted accounting principles) earnings shot up by 37% year over year to $1.95 per share. Wall Street would have settled for $1.87 per share in earnings on revenue of $17.5 billion, and the company easily cruised past those expectations.
Even the guidance was solid. Broadcom expects $19.1 billion in revenue in the current quarter, higher than the $18.5 billion consensus estimate. The guidance points toward a healthy year-over-year increase of 28% in revenue. However, investors seem to be concerned about a couple of factors.
First, management pointed out that the increase in Broadcom's AI revenue is compressing its margins. As a result, the company expects its fiscal Q1 gross margin to fall by 100 basis points on a sequential basis. Management added that Broadcom's gross margins are likely to be impacted by the higher AI product mix.
NASDAQ: AVGO
Key Data Points
Second, Broadcom's AI order backlog of $73 billion (which it expects to fulfill over the next six quarters) and management's reluctance to provide full-year guidance seem to have dented investor confidence. After all, Broadcom reported a much bigger backlog of $110 billion at the end of fiscal Q3. Moreover, investors would have wanted more clarity about the potential growth that it could deliver for the entirety of the new fiscal year.
That's not surprising, as Broadcom is trading at an expensive 26 times sales and 71 times trailing earnings. So, the potential drop in Broadcom's margins and the lack of a significant acceleration in growth in fiscal Q1, as compared to its performance last quarter, haven't gone down well with investors.
Does this mean it would be a good idea to start booking profits in Broadcom stock? Or will the company be able to overcome the post-earnings pullback and jump higher in 2026?
Can investors expect more upside in the next year?
Broadcom's 12-month median price target of $475 points toward 39% upside from current levels. What's more, 92% of the 50 analysts covering the stock suggest buying it. But investors may be wondering if it makes sense to buy Broadcom stock, considering the expensive multiples it is trading at.
Broadcom indeed seems worth buying if we take its AI prospects into account. The company reported a 74% year-over-year increase in its AI semiconductor revenue last quarter. It is now expecting faster growth this quarter, forecasting that its AI revenue will double in fiscal Q1 to $8.2 billion. For comparison, Broadcom's AI revenue increased by 65% in the previous fiscal year to $20 billion.
Another important point worth noting is that Broadcom's consolidated backlog stood at a much more handsome $162 billion last quarter, which is more than double its AI backlog.
Broadcom isn't a pure-play AI chip company. It also sells infrastructure software solutions: high-speed networking components such as switches, routers, and smartphone chips. AI accounted for just under a third of its overall revenue of $63 billion last year. However, the AI business is set to move the needle in a bigger way for Broadcom this year.
We have seen that Broadcom is expecting to fulfill its $73 billion AI semiconductor backlog in six quarters, translating into a quarterly revenue run rate of $12 billion. So there is a possibility of Broadcom's AI revenue landing at $48 billion over the next four quarters, almost 2.5x the revenue it generated from this segment last year.
The company's non-AI business (including infrastructure software) grew by 11% last year to $43.9 billion. Assuming it can sustain such growth in the non-AI business this year as well, its revenue from this segment could increase to almost $49 billion. So, Broadcom's revenue in the current fiscal year could jump to $97 billion (assuming it sells $48 billion worth of AI chips, as estimated).
That points toward a potential jump of 51% in revenue this year, much higher than the 23% growth it clocked last year. Broadcom is currently trading at an expensive 26 times sales, but its accelerating growth justifies that valuation. So, it won't be surprising to see the stock indeed hitting the median price target of $475 in the next year, which is why it may be a good idea to buy this AI stock following its latest pullback.
