Broadcom reported one of the strongest quarters in its history, then watched its stock fall. The Q3 FY2026 release showed revenue of $29.59 billion, up 86% year over year, and non-GAAP EPS of $3.32, a 96% jump. AI semiconductor revenue reached $16.7 billion, up 221%. The selloff followed Q4 guidance of roughly $34.8 billion, which landed slightly below the LSEG consensus of $35.03 billion. For managers tracking capital allocation and infrastructure risk, the market reaction obscures a larger signal: Broadcom now has line of sight to roughly $350 billion in AI semiconductor shipments across FY2027 and FY2028.
The $350 billion forecast changes the conversation
Management guided for AI semiconductor revenue of approximately $115 billion in FY2027 and $230 billion in FY2028, compared with $58 billion expected for FY2026. CEO Hock Tan said on the earnings call that Broadcom has secured the supply for both outlooks and that customer demand exceeds the FY2027 forecast. He added that the company has a "pretty high degree of confidence" in shipping those volumes. Deployments depend on more than wafers. Land, power, completed data-center shells, HBM, substrates, and system memory all factor in. Broadcom is adding substrate capacity in Singapore and expanding optical-component manufacturing to support the buildout.
Customer commitments back the numbers. Anthropic is expected to deploy another 5 GW of TPU capacity in 2027 and an incremental 10 GW in 2028. OpenAI is expected to deploy 1.3 GW in 2027 and more than 5 GW in 2028. Meta remains on a multi-generation MTIA roadmap. Google recently signed a long-term agreement covering future TPU and AI-networking generations. The external spending picture reinforces this: Alphabet expects $175-185 billion of 2026 capital expenditures, largely for AI and cloud infrastructure, while Meta guides to $130-145 billion.
Margin pressure is real, but software provides a cushion
The revenue mix is shifting in ways that compress gross margins. Non-GAAP gross margin fell 210 basis points sequentially to 75% in Q3. Management expects roughly 73% in Q4, down from 78% a year earlier. The culprits are increasing XPU mix and higher memory content. Semiconductor gross margin was only 56.7% in Q3.
Operating leverage offsets part of that pressure. Q3 non-GAAP operating margin rose to 67.9% because revenue scaled much faster than operating expenses. Infrastructure software provides a second stabilizer. Q3 software revenue grew 29% to $8.8 billion and generated roughly an 84% operating margin. A base-case model using a 63% FY2027 operating margin - well below Q3's 67.9% and Q4 guidance of 66% - still produces significant earnings power if AI revenue approaches $115 billion.
XPV financing introduces credit exposure
Broadcom's AI XPV platform, built with Apollo and Blackstone, is designed to facilitate more than 20 GW of XPU-based capacity through 2028. It begins with a $35 billion transaction supporting more than 1 GW for Anthropic. The June 2026 10-Q disclosed that Broadcom backstops the customer's lease obligations over five-year terms, with maximum exposure of roughly $29 billion on that initial arrangement. Exposure grows as racks are deployed and declines as lease payments are made.
Broadcom does not hold a first-lien claim on the racks. Following a customer default, the company can assume the lease or sell the AI racks to reduce exposure. Recovery value matters and is uncertain. A standardized Nvidia GPU cluster has a broad potential user base. A custom XPU optimized for one frontier lab's workloads has fewer natural secondary buyers. The CFO declined during the Q3 call to provide broader residual-value or maximum-exposure guidance, saying future arrangements will be evaluated deal by deal. For managers, XPV is primarily a valuation-multiple risk rather than an immediate earnings problem - unless future tranches require increasingly large Broadcom backstops.
Competition is coming, but the timeline matters
Marvell's expanded relationship with Google is the strongest argument against treating Broadcom's custom-silicon position as unassailable. Hyperscalers want multiple suppliers. However, Reuters reported after Marvell's latest results that revenue from the expanded Google relationship is expected to become more meaningful around fiscal 2029. Broadcom, meanwhile, is already shipping Google's TPU v8i and recently signed a long-term agreement covering future TPU and networking generations. Competitors pose a larger threat to Broadcom's terminal multiple and post-2028 growth than to the FY2027 earnings bridge.
Free cash flow is going to debt, not buybacks
Q3 produced a record $13.7 billion in free cash flow, or 46% of revenue. Management paid $3.1 billion in dividends and repaid $5.6 billion of long-term debt during Q3, plus another $1.5 billion after quarter-end. No share repurchases occurred under the buyback program. Roughly $10.1 billion of repurchase authorization remained as of May 3. For now, debt reduction is the observable priority. If Tan eventually shifts more free cash flow from post-VMware deleveraging toward buybacks, per-share earnings could exceed current estimates.
Why this matters for managers
The investment case turns on whether Broadcom can convert $350 billion in AI semiconductor shipments into earnings without surrendering too much margin or taking excessive financial risk. A base case of $115 billion in FY2027 AI revenue, a 63% operating margin, and 4.94 billion diluted shares produces roughly $18.00 in adjusted EPS. At 26 times forward earnings, that implies a value near $470 - roughly 37% above current levels. The downside scenario of $15.50 EPS at 20 times yields about $310. The bull case of $20.50 EPS at 30 times yields roughly $615. The base case carries weight because secured supply and identifiable deployments support the $115 billion assumption, and the 63% margin estimate already embeds significant deterioration from current profitability. The key variables to watch are whether Broadcom maintains its FY2027 AI trajectory, whether XPU share holds at core customers, and whether XPV guarantees expand faster than free cash flow and recoverable asset value.
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