Why Broadcom Stock Fell 14.1% in December

Shares of Broadcom (NASDAQ: AVGO), which designs and develops semiconductors and infrastructure software, declined 14.1% in December, according to data from S&P Global Market Intelligence.

For context, last month the S&P 500 index was essentially flat (it had a 0.06% return, to be exact), while the tech-heavy Nasdaq Composite index's return was slightly negative, at about negative 0.5%.

For even more context, while Broadcom stock pulled back last month, it still finished 2025 with a strong return of 50.4%. Last year, the S&P 500 and Nasdaq Composite returned 17.9% and 21.1%, respectively. Notably, Broadcom also outperformed shares of artificial intelligence (AI) chip and tech giant Nvidia, which returned 38.9% in 2025.

Now let's dig into why Broadcom stock fell 14.1% in December.

Image source: Getty Images.

Quarterly results were great, but investors were concerned about gross margin guidance

On Dec. 12, Broadcom stock dropped 11.4%. The catalyst was the company's release on the prior afternoon of its report for its fourth quarter of fiscal 2025 (ended Nov. 2).

The quarter's results were great, with both revenue and earnings growing robustly and beating Wall Street's expectations. Revenue grew 28% year over year to $18.02 billion, driven primarily by AI semiconductor revenue surging 74%. This result exceeded the $17.5 billion analyst consensus estimate.

As for Broadcom's AI products, it develops custom AI chips, which are application-specific integrated circuits (ASICs), for several large tech companies, and also sells networking products for AI data centers.

The quarter's adjusted net income was $9.71 billion, or $1.95 per share, representing a 37% year-over-year increase. Wall Street was expecting adjusted earnings per share (EPS) of $1.87.

What investors didn't like was management's guidance for fiscal Q1's gross margin. During the earnings call, management said that it expects this profitability metric to decline approximately 100 basis points (1 percentage point) from the result in Q4, which was 77.9%. (This means gross profit was 77.9% of revenue.)

The expected quarter-over-quarter decline of about 1 percentage point in gross margin is due to the anticipated product mix. Custom AI chip sales are soaring, and this product line, as well as the overall semiconductor segment, sports a lower gross margin than the infrastructure software segment, which is not growing as fast.

To illustrate, in fiscal Q4, the semiconductor segment, which accounted for 61% of total revenue, had a gross margin of approximately 68%, CFO Kirsten Spears stated on the earnings call. The infrastructure software segment, which accounted for 39% of total revenue, had a gross margin of 93%, Spears said.

Looking ahead

Long-term investors should not be concerned with the anticipated 1 percentage-point sequential decline in gross margin in fiscal Q1. Such a slight decline is well worth the soaring revenue growth from AI semiconductors. In dollar terms, gross profit, operating profit, and net profit (or "earnings") should all continue to solidly increase. In addition, Broadcom generates robust free cash flows.

For fiscal Q1, management guided for revenue of $19.1 billion, up 28% year over year. On the earnings call, Spears said management forecasts semiconductor segment revenue of $12.3 billion, up 50% year over year. Within this segment, it expects AI semiconductor revenue of $8.2 billion, up approximately 100%. It expects revenue from the infrastructure software segment to be about $6.8 billion, up 2% year over year.

Moreover, management guided for fiscal Q1 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of 67% of projected revenue. For context, in fiscal Q4, this metric was 68%.

Beth McKenna has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.