Broadcom drops 10% despite surging AI revenues

Broadcom shares declined 9.7% over the past three months, trailing the wider Zacks Computer and Technology sector return of 0.9%. Over the same period, competitor Nvidia rose 10.4%, while AMD and Skyworks fell 2.6% and 1.8% respectively.

The company faces margin pressure as its custom accelerator business grows. XPUs require expensive memory, which pushed third-quarter fiscal 2026 gross margin down 210 basis points sequentially to 75%. Management expects fourth-quarter gross margin to reach about 73%, down from 78% a year earlier. Supply bottlenecks in leading-edge wafers, substrates, power, and data-center shells also pose challenges, though Broadcom plans to bring its Singapore substrate plant online in fiscal 2027 to add capacity.

Despite margin headwinds, third-quarter fiscal 2026 total revenue jumped 86% year over year to $29.6 billion, with Semiconductor Solutions up 127% to $20.8 billion. AI semiconductor sales surged 221% year over year to $16.7 billion and are projected to reach $21.7 billion in the fourth quarter. Broadcom forecasts AI revenue of approximately $58 billion for fiscal 2026, $115 billion for fiscal 2027, and $230 billion for fiscal 2028.

Non-AI semiconductor revenue reached $4.2 billion in the third quarter, up 5% year over year but flat sequentially. Infrastructure software revenue stood at $8.8 billion and is expected to stabilize near $8.7 billion in the fourth quarter. Consensus estimates compiled by Zacks track fiscal 2026 earnings at $11.74 per share, representing 72.14% annual growth, with fourth-quarter earnings projected at $3.66 per share.