2026-09-04

Broadcom Stock Falls 6% Despite 221% AI Revenue Growth - Why Gross Margin Sliding From 78% to 73% Spooked Wall Street

Written & reviewed by the TradeSmrt editorial team · 2026-09-04

In this article

What Happened
Why Shrinking Gross Margin Undercut an Otherwise Blowout AI Story
What to Take Away From This
FAQ
Sources

What Happened

Broadcom (NASDAQ: AVGO) reported fiscal third-quarter 2026 results after the close on Wednesday, September 2. Revenue came in at $29.6 billion, above the $29.36 billion analysts expected, and adjusted earnings per share hit $3.32, beating the $3.24 consensus. The standout number was AI semiconductor revenue, which jumped 221% year-over-year to $16.7 billion in the quarter, with the company guiding fourth-quarter AI semiconductor revenue to $21.7 billion, up 236% year-over-year. On the earnings call, CEO Hock Tan said "demand for our custom AI accelerators and networking continues to be very strong," and went further, laying out a long-range forecast that put AI semiconductor revenue at roughly $115 billion in fiscal 2027 - nearly double this year's total - and $230 billion in fiscal 2028, doubling again.

On paper, it was hard to find fault with those numbers. Yet the stock reaction was the opposite of what the headline print suggested. On Thursday, September 3, the day after the report, Broadcom shares tumbled as much as 6% intraday, falling 6.3% within the first half hour of trading. That decline came on a day when all three major U.S. indexes closed up roughly 1%, meaning Broadcom's drop wasn't part of a broader market move - it was a stock-specific reassessment. Nvidia edged higher and AMD slipped only modestly the same day, reinforcing that this wasn't a sector-wide semiconductor selloff but a verdict specific to Broadcom.

What disappointed the market wasn't revenue or earnings - it was guidance. Broadcom projected fourth-quarter revenue of approximately $34.8 billion, short of the $35.03 billion Wall Street consensus. Even with a clean beat-and-raise quarter behind it, a guidance number that landed just below expectations was enough to trigger a sharp selloff in a market that has grown hypersensitive to any wobble in AI-linked valuations.

Why Shrinking Gross Margin Undercut an Otherwise Blowout AI Story

The deeper concern went beyond the guidance miss itself and into the company's margin structure. Broadcom guided fourth-quarter consolidated gross margin to about 73%, down five full percentage points from 78% a year earlier. That's not a one-time accounting quirk - it's a mechanical consequence of the business mix shifting underneath the growth story. Custom AI accelerators (XPUs) and high-bandwidth memory (HBM) are becoming a larger share of Broadcom's revenue, and both carry meaningfully higher cost structures than the networking chips and enterprise software businesses that have traditionally been Broadcom's cash cows. In other words, the faster AI semiconductor revenue grows as a share of the total, the more that growth is being built on comparatively thinner margins.

That raised an obvious question for investors: strong AI chip demand was already priced in - it's the reason the stock has been one of the year's biggest AI winners - and Tan's own long-range forecast of $115 billion and $230 billion in AI revenue for fiscal 2027 and 2028 sounded aggressive enough to be almost too optimistic. The real question was how profitably that growing revenue would convert into earnings. Custom silicon contracts are typically built around long-term commitments with a handful of hyperscaler and AI-lab customers, which can leave Broadcom with less pricing leverage than it has in commodity chip businesses, and the cost of sourcing high-performance HBM is itself volatile, tied to the broader memory market cycle. Broadcom has also spent the past several quarters repeatedly raising the bar for itself with numbers the market struggled to fully digest - so a quarter this strong arguably raised expectations for the next one even further, and guidance that came in just shy of that newly elevated bar drew an outsized penalty.

Placed alongside the earnings reactions from Dell and Palo Alto Networks earlier the same week, the pattern becomes sharper. Dell's beat was anchored by a $95 billion AI server backlog - forward-looking evidence that revenue was effectively locked in for several coming quarters - and the stock jumped 16% in a day. Palo Alto Networks beat on revenue and EPS but fell 13% over two days after signaling that margins would come under pressure from rising cloud and memory costs. Broadcom likewise beat headline numbers but stumbled on the two things the market is now scrutinizing most closely - the margin trajectory (78% to 73%) and next-quarter guidance - producing a reaction that tracks much closer to Palo Alto Networks' than to Dell's. Taken together, the first week of September's earnings season has repeatedly shown that a headline revenue-and-EPS beat alone no longer predicts the stock reaction; the market is scrutinizing the sustainability and profitability of that growth far more closely than it did even a year ago.

Zooming out adds useful context. Broadcom struck a roughly $10 billion custom chip supply deal with OpenAI earlier this year and, alongside OpenAI, unveiled Jalapeño, its first jointly developed custom AI accelerator - developments that helped push the stock to an all-time high near $495 earlier this year and cemented Broadcom's place among the market's core AI infrastructure plays. Even after Thursday's drop, the stock remains roughly 20% below that peak but still up more than 30% over the trailing twelve months, which is one reason several analysts characterized the selloff as an overreaction rather than a fundamental re-rating - arguing that a 221% AI revenue growth rate and management's own $230 billion 2028 target make the long-term growth case difficult to dismiss over a single guidance miss.

One more thread worth watching: reports have surfaced that Broadcom is exploring debt financing of close to $100 billion to fund AI infrastructure buildout, underscoring just how capital-intensive custom silicon and data-center networking manufacturing has become. With gross margin compression and the prospect of a large new debt load arriving in the same week, some market participants argue the next phase of the AI trade may reward companies less for the speed of their growth and more for how soundly that growth is financed.

What to Take Away From This

A gross margin trajectory can outweigh a headline beat. Broadcom cleared both revenue and EPS estimates, yet guidance for gross margin to fall five points year-over-year was enough to send the stock down 6% in a single session. Reading an earnings report means checking not just how much a company earned, but what margin that growth is being built on.
A shifting product mix is a structural margin driver, not a one-off. Rising custom AI accelerator and HBM content mechanically pushes gross margin lower because those product lines carry higher costs than Broadcom's legacy networking and software businesses. Fast-growing revenue lines are worth checking for whether that growth is arriving on thinner margins.
Beating consensus isn't enough once expectations are already extreme. Hock Tan laid out an aggressive multi-year AI revenue forecast through 2028, and the stock still fell - a reminder that the market's largest AI-linked names face a much higher bar, where even a modest guidance miss can trigger an outsized reaction.
Comparing same-week earnings reactions across companies sharpens the read on what the market actually cares about. Dell's 16% surge, Palo Alto Networks' 13% two-day drop, and Broadcom's 6% decline all point to the same conclusion: as of September 2026, the market is weighing the durability and profitability of growth more heavily than the size of the beat itself.

FAQ

Why did Broadcom stock fall if earnings beat expectations?

Revenue ($29.6 billion) and EPS ($3.32) both beat consensus, but fourth-quarter revenue guidance of about $34.8 billion came in below the $35.03 billion Wall Street expected, and guided gross margin fell to 73% from 78% a year earlier. The 221% surge in AI semiconductor revenue was good news, but concerns that this growth is arriving on thinner margins, combined with the guidance miss, triggered the selloff.

Why did gross margin fall from 78% to 73%?

Custom AI accelerators (XPUs) and high-bandwidth memory (HBM) are making up a larger share of Broadcom's revenue, and both carry higher costs than Broadcom's traditional networking chip and software businesses. As AI semiconductor revenue grows faster than the rest of the business, overall gross margin mechanically declines - it's a mix shift, not a one-time hit.

How does this compare to Dell and Palo Alto Networks' earnings reactions this week?

Dell surged 16% on a $95 billion AI server backlog that locks in future revenue visibility. Palo Alto Networks and Broadcom both fell - 13% over two days and 6% in a day, respectively - on margin-related concerns despite beating headline estimates. Across all three, the common thread was that margin trajectory and forward revenue visibility mattered more to the stock reaction than the size of the quarterly beat.

Sources

This article is an original synthesis and analysis based on the reporting below, not a reproduction of the original articles. Please check the source articles directly for the most current figures and details.

⚠️ This article is for informational purposes only and is not investment advice. Market conditions change constantly - always verify the latest data before making investment decisions.