Broadcom's AI Surge Faces Margin Test: Is the Stock Slide a Buying Opportunity?

Shares of semiconductor and software giant Broadcom (NASDAQ: AVGO) have retreated roughly 20% from their recent peak, a correction that has investors questioning whether the sell-off is a temporary stumble or a sign of deeper challenges. The decline comes despite the company reporting blockbuster demand for its artificial intelligence (AI) chips and robust growth in its infrastructure software business, fueled by VMware Cloud Foundation (VCF).

The core issue unsettling the market is profitability. Broadcom's management recently forecast a sequential decline in consolidated gross margin for the current quarter, attributing the pressure to a shifting revenue mix. As AI-related semiconductor sales—which carry lower margins than the company's lucrative software segment—become a larger portion of the business, overall profitability metrics are feeling the squeeze. This dynamic is expected to persist throughout the fiscal year.

"We're navigating a transition where top-line growth and bottom-line expansion are temporarily decoupled," explained a company spokesperson. The strategy hinges on operating leverage: driving revenue volumes so high that total gross margin dollars increase, even if the margin percentage shrinks. Essentially, Broadcom is betting it can offset margin compression with sheer scale and efficiency gains.

This trade-off will become more pronounced. In the latter half of the fiscal year, as Broadcom ships more complete AI systems, it will incorporate more third-party components (like memory) into its offerings. These "pass-through" costs will further pressure gross margin percentages, though the company insists total profit dollars will continue to rise.

The demand story, however, remains extraordinarily strong. Broadcom is a key beneficiary of the AI infrastructure boom, supplying custom AI accelerators (XPUs), networking switches, and optical components essential for modern data centers. Its order backlog tells the tale: a recent $10 billion order from Anthropic for its Ironwood TPU racks, an additional $11 billion commitment for late 2026, and the addition of a fifth major XPU customer. CEO Hock Tan reported "record orders" across multiple product lines destined for AI data centers.

In total, Broadcom's AI-related backlog has ballooned to over $73 billion, nearly half of its consolidated $162 billion backlog. Management projects AI revenue will double year-over-year to $8.2 billion in the first quarter of 2026.

Simultaneously, the infrastructure software division, anchored by VCF, is firing on all cylinders. Software revenue jumped 19% year-over-year last quarter, with the segment's backlog soaring to $73 billion from $49 billion a year prior.

Wall Street's take? The near-term margin concerns are acknowledged but largely overshadowed by the colossal growth runway. The analyst consensus rating on AVGO remains a "Strong Buy," suggesting many view the dip as a potential entry point for a company positioned at the heart of two secular trends: AI and enterprise cloud modernization.

Market Voices

David Chen, Portfolio Manager at TechGrowth Capital: "This is a textbook case of market myopia. Focusing solely on margin percentages while Broadcom is scaling its AI revenue to tens of billions is missing the forest for the trees. The dollar profit growth is what matters for long-term value creation."

Rebecca Shaw, Senior Analyst at ClearView Research: "The margin trajectory is a valid concern and introduces execution risk. Investors need to see if Broadcom's operating leverage thesis plays out as smoothly as management expects. The next few quarters will be critical for validation."

Marcus Thorne, Independent Investor & Commentator: "It's simple math! Lower margins on a exploding revenue base can still mean massive profits. The sell-off is an emotional overreaction. The backlog is the clearest signal of future cash flows you could ask for."

Anya Petrova, Editor at 'The Skeptical Investor': "The hype is blinding everyone. 'AI revenue' is becoming a catch-all excuse for deteriorating profitability. What happens when this capex cycle slows? The software business is great, but it's now subsidizing lower-margin chip sales. This isn't the quality story it was a year ago."

Disclosure: The author of the original analysis, Sneha Nahata, had no positions in the securities mentioned. This article is for informational purposes only and was adapted from source material published on Barchart.com.