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Broadcom (AVGO -6%) is trading lower despite reporting upside results for EPS and revenue in Q3 (Jul), as investors appear to have been looking for an even larger AI-driven beat and a more aggressive Q4 (Oct) outlook. Revenue rose 85.5% yr/yr to a record $29.59 bln, fueled by exceptional demand for AI semiconductors. Semiconductor Solutions revenue increased 127% yr/yr to $20.84 bln, while AI semiconductor revenue surged 221% yr/yr and 54% sequentially to $16.7 bln. Q4 guidance calls for revenue of $34.8 bln, up 93% yr/yr, with AI semiconductor revenue expected to reach $21.7 bln, but the total revenue forecast was only modestly above expectations.

• AI semiconductors: AI semiconductor revenue more than tripled yr/yr to $16.7 bln, exceeding prior guidance of $16.0 bln. Broadcom said demand from its six XPU customers is accelerating, with Q4 AI semiconductor revenue expected to rise more than 236% yr/yr to $21.7 bln. The company also expects both XPU and AI networking revenue to triple yr/yr in Q4.
• Custom accelerators: Broadcom continues to expand its position in custom AI accelerators, delivering Ironwood TPU v7 to Anthropic and Google in high volume, beginning production shipments of TPU v8i to Google, and shipping Jalapeño, OpenAI's first-generation custom accelerator. Broadcom also expects production shipments of Meta's MTIA accelerator in Q4, reinforcing its exposure to multiple hyperscaler AI programs.
• Q4 outlook: Broadcom expects Q4 revenue to increase 93% yr/yr to $34.8 bln, including semiconductor revenue of $26.1 bln, up 136% yr/yr, and infrastructure software revenue of $8.7 bln, up 24-25% yr/yr. While the outlook remains exceptionally strong, the relatively modest upside to expectations appears to have disappointed investors who were positioned for another significant forecast increase.
• Margins: Q3 gross margin was 75%, down 210 bps sequentially as AI semiconductors became a larger portion of the mix, but above guidance of 74%. Operating margin increased 240 bps yr/yr to 67.9%, highlighting substantial operating leverage. Broadcom expects Q4 gross margin to decline to 73% as the mix shifts further toward XPUs with higher memory content, while operating margin is expected to remain 66%, roughly flat yr/yr.
• AI visibility: Broadcom provided unusually strong visibility into the next several years, saying it has secured sufficient supply to double AI revenue again in FY27 to approximately $115 bln. Demand exceeds that level, however, with supply remaining the primary constraint. The company sees a path to another doubling of AI semiconductor revenue to approximately $230 bln in FY28 and remains on track to exceed $30 of EPS in FY28.

Briefing.com Analyst Insight

Broadcom's comments around FY27 and FY28 suggest that hyperscaler demand remains well ahead of its ability to supply the market. The company's exposure is also becoming increasingly diversified across Anthropic, Google, OpenAI, and Meta, reducing reliance on any single AI customer. At the same time, the quarter highlights an emerging margin trade-off. As AI accelerators and their increasingly large memory content represent a greater proportion of revenue, gross margin is expected to decline. The overall Q4 forecast needed to be substantially above consensus to generate a positive reaction. The near-term pullback therefore appears more related to elevated expectations than to any deterioration in Broadcom's AI opportunity.