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Broadcom (AVGO -14%) is trading sharply lower despite its usual typical upside for EPS and revenue in Q2 (Apr). Revenue rose a healthy 47.9% yr/yr to a record $22.19 bln, fueled by strength in AI semiconductors. This top-line strength translated into exceptional profitability with Q2 posting record operating margin at 67% and adjusted EBITDA margin was a record 69%, which was above prior guidance.

Management's tone remained highly confident, highlighting "insatiable" AI demand, bookings above shipments, and visibility into 2027-2028, but investors appear to be focusing on the gap between strong fundamentals and an even stronger setup embedded in the stock after its run into earnings. The expected Q3 gross margin step-down to about 74%, even if management framed it as a mix issue tied to faster semiconductor growth, likely added to the reset.

• AI demand quality: Q2 AI semiconductor revenue reached $10.8B, up 143% yr/yr, and Q2 AI bookings exceeded $30B versus $10.8B shipped, reinforcing that demand remains well ahead of current revenue recognition.
• Forward visibility: Management said full-year 2026 AI semiconductor revenue should reach $56B, up about 180%, reiterated that 2027 AI revenue should be in excess of $100B, and pointed to multi-year commitments with Google, Anthropic, OpenAI, Meta, plus two additional customers with $6B of purchase orders to date. 
• OpenAI: For OpenAI, AVGO announced that it has delivered silicon, and is on track for production in late 2026. AVGO has a contractual commitment to deploy 1.3 gigawatts in 2027 as part of the larger 10 gigawatts agreement announced last year.
• Margin mix: Consolidated gross margin was 77.1% in Q2 and is guided to about 74% in Q3 as semiconductors outgrow infrastructure software; management argued this is not a structural deterioration, noting Semiconductor Solutions gross margin was still about 70% and segment operating margin improved to 62%.
• Broader business support: The non-AI semiconductor business is improving, with Q2 non-AI revenue up 6% yr/yr to $4.2B and bookings above $6B, while Q3 non-AI semiconductor revenue is expected to rise to about $4.5B, up 12% yr/yr.

Briefing.com Analyst Insight

This was a solid beat-and-raise and a key highlight was Broadcom reaffirming FY27 AI semiconductor revenue guidance to be in excess of $100 bln. However, we think the weakness is being fueled by perhaps some disappointment in the Q3 revenue guidance. While it was solid, the upside was not as strong as we saw last quarter. Also, Q3 gross margin guidance of 74% is maybe concerning investors as well, following 77.1% gross margin in Q2. While a decline was likely expected as the proportion of AI revenue significantly grows, perhaps the magnitude of the decline was larger than expected. In fairness, AVGO stresses this is not a structural change in semiconductor margin, but rather it reflects product mix between semiconductors and infrastructure software. On a final note, the stock had run 60% since late March, so it was pretty much priced to perfection. As such, any chink the armor was going to take the stock down a notch. Several other AI chip names are lower in sympathy: MU -8%, ARM -7%, AMD -5.3%, QCOM -4.8%, MRVL -3.9%, ALAB -3.5%, INTC -3.1%, NVDA flat.