Why Broadcom Stock Is Still Going Down
Key Points
Broadcom beat on earnings and beat on guidance Wednesday.
Today, investors are wondering if Broadcom nonetheless missed on its AI guidance.
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Broadcom (NASDAQ: AVGO) stock closed down 12.6% yesterday, despite squeaking past analyst forecasts for Q2 2026 earnings. Shares of the specialty semiconductor maker continued to slide in Friday morning trading, and are down 4.2% through 9:45 a.m. ET.
But does Broadcom stock deserve to get sold off so hard after an earnings beat?
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How Broadcom disappointed investors yesterday
Broadcom beat by a nickel yesterday, reporting $2.44 per share in pro forma earnings and a GAAP profit of $1.91 per share -- up 85% year-over-year. Furthermore, Broadcom management raised guidance for the current third quarter, predicting sales will reach $29.4 billion, up 32% sequentially. That's impressive quarter-over-quarter growth, and as Erste Group analyst Hans Engel points out in a note upgrading Broadcom stock to buy today, $29.4 billion is also 89% growth year over year.
So why are investors so upset with Broadcom?
Basically, it boils down to what type of growth Broadcom is achieving. Broadcom CEO Hock Tan told investors that he expects $16 billion of this quarter's $29.4 billion in revenue will come from selling artificial intelligence chips. That's better than 200% year-over-year growth, but it's a bit below the $17.2 billion in AI chips that Wall Street analysts had been forecasting.
What's next for Broadcom?
Investors are looking at these numbers, and instead of praising Broadcom for delivering a "guidance beat," they're characterizing the report as an AI-guidance miss. I think that's a mistake. Whether the chips sold are for AI or another use case, 89% growth remains impressive, and, as Engel points out, profit margins are expected to remain "stable at a high level," yielding strong profit growth as well.
At 94 times earnings, I cannot call Broadcom a cheap stock -- but it's growing just fine.
Should you buy stock in Broadcom right now?
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Broadcom. The Motley Fool has a disclosure policy.
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