"AI Fear Wall" Blocks the Way, Will Broadcom(AVGO.US) Fall Even with a Good Earnings Report Tonight?

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

The chipmaker’s stock has fallen 24% from its all-time high in December last year, underperforming the S&P 500 index. This sell-off is part of a broader trend where investors are dumping large tech stocks amid concerns over the sustainability of hundreds of billions of dollars in artificial intelligence R&D investments. Broadcom is the seventh-largest company by market cap in the S&P 500, valued at $1.5 trillion. It is a chip manufacturing partner for AI giants like Alphabet (GOOGL.US) and others, making it a beneficiary of these massive investments.

While these concerns could materialize in the future, Broadcom currently appears to be in a stable 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 increasing 29% to approximately $19.3 billion. AI-related sales are expected to nearly double to about $8.2 billion. If the company also issues an encouraging outlook, Wall Street professionals won’t be surprised.

Paul Meeks, head of technology research at Freedom Capital Markets, said, “Broadcom will certainly say a lot, but it might not matter.”

Looking back at Nvidia (NVDA.US) last week, after its earnings report, the chip giant beat expectations and raised its guidance due to strong product demand and large-scale data center capex plans. However, over the next two trading days, Nvidia’s stock plunged 9.4%, its biggest two-day drop since April.

Broadcom’s stock fell sharply after its December earnings report, dropping over 11%, its worst performance in nearly a year. The issue is that AI product backlog orders for the next six quarters total up to $73 billion, well below expectations. Investors naturally want to know the latest order updates and the progress of Broadcom’s tensor processing unit (TPU) chips for Google. Google’s orders are expected to grow significantly in the second half of this year. Collaboration with OpenAI is also expected to help Broadcom expand its business by 2027.

Breakthrough: “Deep Moat”

Shaon Baqui, senior technology research analyst at Janus Henderson, said, “For them, emphasizing their real expertise in designing large custom chips is crucial. They have successful experience with seven generations of TPUs for Google. This generational capability is very important, especially when competing with Nvidia.” The firm holds shares in Broadcom.

He added, “Manufacturing these massive AI acceleration chips is really hard. I think Broadcom should emphasize that they have a very strong competitive advantage in this field.”

Another issue mentioned in the last earnings report was profit margins. CEO Hock Tan said that AI sales had dragged down margins. Broadcom’s adjusted gross margin for the first quarter is expected to be around 77%, down from 78% in the previous quarter and 79% a year ago.

Analysts may raise questions about the company’s software business, which accounts for 42% of total revenue in 2025. This segment was previously seen as a way to balance the cyclical nature of semiconductor sales, but recent software stock sell-offs have put pressure on the stock.

Meeks from Freedom Capital said, “It will be interesting to see how they report and guide this particular area. They will need to directly address questions about how they view this part of the business during the Q&A. This segment used to be a key source of diversification for their investments. But now, in the AI era, it’s seen as a huge burden.”

Recent sell-offs have indeed pushed Broadcom’s stock lower. However, there may still be room for further declines. Currently, Broadcom’s P/E ratio is about 27, lower than the peak of 42 in December but still well above its five-year average of 22. Additionally, its P/E remains higher than Nvidia’s 21.

Options traders are betting on significant volatility after the earnings release, with expected stock swings of about 7%. Analysts point out three potential catalysts for a stock boost: announcing new large-scale customers contributing significant revenue, a substantial increase in AI backlog orders, and positive comments from Tan regarding deals with OpenAI and Anthropic.

However, given the recent market pessimism, even these factors may not be enough to push Broadcom’s stock higher. Analysts note, “It seems that the better the earnings, the worse the stock performance—at least during this earnings season.”