Broadcom sees dip in quarterly margins due to AI, shares fall
Broadcom, a leading semiconductor company, announced its first-quarter revenue projections, exceeding Wall Street estimates but also forecasting a decline in margins due to a higher mix of AI revenue. As a result, shares fell by 5% in extended trading.
The company has recently entered the AI chip business, which has raised concerns among investors regarding profitability and the costs associated with significant investments. Broadcom’s CEO, Hock Tan, revealed a backlog of $73 billion that is expected to be shipped over the next 18 months. However, the company’s CFO, Kirsten Spears, mentioned on an earnings call that profit margins could potentially drop due to a higher mix of AI revenue.
The concentration of AI customers at Broadcom, along with the anticipation of lower margins for AI system sales, contributed to the decline in shares, according to Kinngai Chan, a senior research analyst at Summit Insights. The backlog primarily consists of five customers and includes high-priced systems, which are expected to have lower gross margins and become a larger part of total sales in future quarters.
The potential decline in gross margins raises concerns about the impact of costs related to contract chip manufacturer TSMC on Broadcom’s custom AI processors business, as noted by Gil Luria, an analyst at D.A. Davidson. Despite these challenges, Broadcom continues to collaborate with major cloud providers like Google and Meta Platforms to design and manufacture processors known as ASICs, offering a crucial alternative to Nvidia’s GPUs.
Amidst growing spending on AI by U.S. cloud providers, concerns have emerged about the possibility of an AI bubble due to limited evidence of real-world productivity gains, soaring valuations, and interconnected investments. However, Tan expressed optimism about Broadcom’s AI semiconductor revenue, expecting it to double to $8.2 billion in the fiscal first quarter.
Broadcom’s projected quarterly revenue of approximately $19.1 billion surpasses analysts’ average estimate of $18.27 billion, based on data compiled by LSEG. In the fourth quarter ended November 2, the company reported revenue of $18.02 billion, exceeding estimates of $17.49 billion.
Overall, Broadcom’s foray into the AI chip business presents both opportunities and challenges, with the company navigating through changes in revenue mix and margin dynamics to capitalize on the growing demand for AI technologies. As the semiconductor industry continues to evolve, Broadcom remains a key player in driving innovation and shaping the future of AI applications.
(Reporting by Juby Babu in Mexico City; Editing by Maju Samuel and Alan Barona)
