Broadcom (AVGO) on Dec. 14, 2025: AI Revenue Is Surging, Margins Are the Question
AVGO sold off hard after a record quarter. The issue isn't demand. It's mix and margins as AI custom chips and rack-level systems take a bigger share.
For managers, the takeaway is simple: expect strong AI-driven top-line growth, while gross margin rate flickers. Focus on absolute profit dollars and delivery timing.
Where AVGO stands today
Markets are closed on Sunday. On Friday, Dec. 12, Broadcom closed at $359.93, down 11.43% after trading between roughly $382.00 and $355.15 on heavy volume.
The drop followed a solid fiscal Q4 print and higher guidance, but a clear signal that gross margin could dip as AI mix rises.
What drove the move
- Beat on results, margins stole the spotlight. Q4 revenue was $18.015B (+28% YoY). Non-GAAP EPS was $1.95. Free cash flow hit $7.466B (~41% of revenue). Adjusted EBITDA was $12.218B (~68%). Guidance: Q1 revenue of ~$19.1B with Adjusted EBITDA at ~67%. The rub: management flagged ~100 bps sequential gross margin pressure as AI mix increases.
- AI is accelerating, and the backlog is big. Fiscal 2025 AI revenue reached ~$20B (+65% YoY). Q4 AI semiconductor revenue was $6.5B (+74% YoY), with Q1 expected at ~$8.2B. There's a ~$73B AI backlog expected over ~18 months-strong visibility, but not enough for some who wanted more near-term upside.
- The "mystery customer." Broadcom referenced a fifth AI customer and a ~$1B order without naming the buyer. The ambiguity added noise even as the customer roster expands.
Why margins matter even as AI scales
More system-level sales introduce pass-through components. That can lower the gross margin rate while still lifting total gross profit dollars.
Management's core message: as AI scales, operating profit dollars can grow even if the percentage looks lower for a few quarters.
Software is the ballast: VMware
AVGO is more than chips. Infrastructure software-driven by VMware Cloud Foundation-adds durability to the model. Management discussed FY infrastructure software revenue around $27B.
In Q4, Semiconductor Solutions delivered ~$11.072B and Infrastructure Software ~$6.943B. That mix helps smooth hardware cyclicality.
OpenAI timing and why it matters
OpenAI's October update pointed to 10 GW of OpenAI-designed accelerators and Broadcom networking, with deployments starting in 2H 2026 and running through 2029. That's a meaningful long-term vector, but it won't change the next couple of quarters.
If you're modeling near-term AI revenue, don't assume OpenAI-level volumes show up immediately. See the OpenAI announcement for timing context.
Street view after the selloff
Despite the drop, several banks leaned bullish, citing a mix issue rather than a demand issue. Targets clustered in the low-to-mid $400s, with highs around $500.
One recurring theme: "gross margin dollars" matter more than the rate as AI moves from chips to full racks. That's the lens many are using to evaluate the next year.
What managers should do now
- CFOs and Finance: Model a lower gross margin rate on AI-heavy quarters, but stress-test gross profit dollars. Build scenarios for: (a) AI share at 40-50% of semis, (b) 50-100 bps GM pressure, (c) system-level mix rising. Tie to operating leverage and cash return capacity.
- Procurement and Infra Leads: Expect tight supply in Ethernet/optics and custom accelerators. Lock capacity windows, secure second sources, and define substitution rules for optics and NICs to protect build schedules.
- Portfolio Managers: Watch for stabilization after the high-volume drop, follow-up analyst model updates, clarity on the "fifth customer," and the dividend record date. Treat gross margin headlines as mix optics-verify if gross profit dollars and FCF are still compounding.
- AI Product Owners: Plan for rack-level designs and TCO at the cluster level (silicon + optics + networking + power). Align buildouts with facility readiness and power contracts to avoid stranded capex.
What to watch next week
- Stabilization after an 11% one-day move as dip-buyers and rebalancing flows step in.
- Analyst updates as models reflect the margin commentary and system mix.
- Customer clarity on the new AI buyer and shipment timing.
- Capital returns: dividend raised to $0.65 per share, payable Dec. 31, 2025 to holders of record Dec. 22, 2025.
Key numbers at a glance
- Q4 revenue: $18.015B (+28% YoY)
- Non-GAAP EPS: $1.95
- Free cash flow: $7.466B (~41% of revenue)
- Adjusted EBITDA: $12.218B (~68% of revenue)
- Q1 revenue guide: ~$19.1B; Adjusted EBITDA ~67%
- Q4 AI semiconductor revenue: $6.5B (+74% YoY)
- Q1 AI semiconductor guide: ~$8.2B
- AI backlog: ~$73B over ~18 months
- Dividend: $0.65 per share (payable Dec. 31, 2025; record date Dec. 22, 2025)
Context on the broader AI trade
The selloff synced with a wider shift in late 2025: investors are getting more selective. Profitability, capex intensity, and timing are under a microscope. A recent Reuters note framed it as valuation sensitivity returning to AI leaders.
Bottom line
AVGO put up strong numbers and guided higher. The debate is about margin rate vs. gross profit dollars as AI mix rises. If the company ships the backlog on time and keeps FCF strong, the long-term case holds. If mix pressures linger and visibility slips, valuation support thins.
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