"AI Fear Wall" blocks the way, will Broadcom (AVGO.US) fall tonight even if earnings are good?

Broadcom (AVGO.US) will announce its latest quarterly results on Thursday morning Beijing time. Wall Street expects the company to report strong earnings, but based on recent trading patterns, even exceeding this high standard may not be enough to reverse the stock’s prolonged slump over the past few months.

The chipmaker’s stock price has fallen 24% from its all-time high set last December, significantly underperforming the S&P 500 index. This sell-off is part of a broader trend where investors are dumping shares of major tech companies due to concerns over the sustainability of hundreds of billions of dollars in AI research and development investments. Broadcom is the seventh-largest company in the S&P 500 by market capitalization, valued at $1.5 trillion, and it is a chip manufacturing partner for Alphabet (GOOGL.US) and other AI giants, thus benefiting from these massive investments.

Despite these concerns potentially materializing in the future, Broadcom currently appears to be in a solid position. Analysts expect the company’s adjusted earnings per share for the first fiscal quarter to grow 27% year-over-year to $2.03, with revenue expected to increase by 29% to approximately $19.3 billion, of which AI-related sales are projected to nearly double to about $8.2 billion. If the company simultaneously releases an encouraging earnings outlook, Wall Street professionals would not be surprised.

Freedom Capital Markets’ Head of Technology Research, Paul Meeks, stated, “Broadcom will certainly make a lot of statements, but they may be irrelevant.”

Looking back at NVIDIA’s (NVDA.US) stock performance following its earnings report last week. The chip giant exceeded Wall Street expectations and raised its guidance due to strong demand for its products and plans by hyperscale data center operators to make large capital expenditures. However, in the following two trading days, NVIDIA’s stock plummeted 9.4%, marking its largest two-day decline since April.

Broadcom’s stock price fell sharply after releasing its earnings report last December, dropping over 11%, marking its worst performance in nearly a year. The issue is that the backlog of AI product orders for the next six quarters is as high as $73 billion, which is far below expectations. Investors naturally want to know the latest developments regarding order status and the progress of the tensor processing unit (TPU) chips that Broadcom produces for Google. Google’s orders are expected to increase significantly in the second half of this year. Collaborations with OpenAI are also anticipated to drive Broadcom’s business expansion by 2027.

Breakthrough Point: “Deep Moat”

Shaon Baqui, Senior Technology Research Analyst at Janus Henderson, stated, “It is crucial for them to emphasize their true expertise in designing large custom chips, especially given their successful experience with seven generations of TPU for Google. This generational capability is very important, especially in the context of competing with NVIDIA.” The firm holds shares in Broadcom.

He added, “Manufacturing these giant AI accelerator chips is really difficult. I think Broadcom should emphasize that they have very strong competitive advantages in this field.”

Another issue mentioned in Broadcom’s last earnings report is profit margins, with CEO Hock Tan stating that sales from the AI business have impacted margins. The adjusted gross margin for Broadcom’s first fiscal quarter is expected to be around 77%, down from 78% in the previous quarter and 79% in the same period last year.

Analysts may question the company’s software business, which accounted for 42% of its total revenue in 2025. This segment has been viewed as a way to balance the cyclical fluctuations of semiconductor sales, but recent sell-offs in software stocks have put pressure on the share price.

Freedom Capital’s Meeks said, “It will be interesting to see how they report and how they guide the development of this specific area. They clearly need to directly answer questions in the Q&A about how they view this part of the business, which was once an important source of their diversified investments. Now, in the AI era, it is seen as a huge burden.”

The recent sell-off of Broadcom’s stock has indeed caused its price to decline. However, there may still be room for further decreases. Currently, Broadcom’s price-to-earnings ratio is about 27 times, which, although lower than last December’s peak of 42 times, is still much higher than its five-year average of 22 times. Additionally, Broadcom’s price-to-earnings ratio is also higher than its competitor NVIDIA’s 21 times.

Options traders are betting on significant volatility in the stock price following the earnings report, with expectations of about a 7% price swing after the announcement. Analysts point out three factors that could boost the stock price: announcing new large-scale customers with significant revenue contributions, a substantial increase in AI backlog orders during the same period, and positive comments from Tan regarding deals with OpenAI and Anthropic.

However, considering the market’s recent pessimistic reaction, even these may not be enough to trigger a rise in Broadcom’s stock price. Analysts noted, “It seems that the better the performance, the worse the stock price behaves. At least this has been the case this earnings season.”