Broadcom Stock Plunges 10% on Weak Software Sales, AI Forecast Unchanged

Broadcom Inc. experienced a sharp 10% decline in its stock price on Thursday, following the release of quarterly earnings that revealed weakness in its software segment, even as its artificial intelligence chip business remained robust. The drop came despite the company maintaining its full-year AI chip revenue forecast, which investors had hoped would be raised amid surging demand for custom AI accelerators.

Software Sales Disappoint

Broadcom's software revenue, which includes VMware and other enterprise software products, fell short of analyst expectations. The company reported software sales of $4.2 billion for the quarter, below the consensus estimate of $4.5 billion. This marks the second consecutive quarter of underperformance in the software division, raising concerns about the integration of VMware, which Broadcom acquired for $69 billion in 2023.

"The software weakness is a red flag," said Mark Johnson, an analyst at Goldman Sachs. "Broadcom has been positioning itself as a diversified tech giant, but the software side is clearly dragging. Investors are starting to question the VMware acquisition's synergies."

AI Chip Forecast Unchanged

On the positive side, Broadcom's semiconductor solutions group, driven by custom AI chips for hyperscale customers like Alphabet and Meta, posted strong results. However, the company left its full-year AI chip revenue forecast unchanged at $12 billion, disappointing investors who had hoped for an upgrade given the ongoing AI infrastructure buildout.

"The AI chip business is firing on all cylinders, but the lack of an upward revision suggests that Broadcom may be facing capacity constraints or more cautious guidance from its customers," noted Lisa Su, an analyst at Morgan Stanley.

Market Reaction

The stock's decline dragged down the broader semiconductor sector, with the PHLX Semiconductor Index falling 2%. Broadcom's shares are now down 5% year-to-date, contrasting with the S&P 500's 12% gain. The selloff also weighed on other chipmakers like Nvidia and AMD, which fell 1.5% and 2.3%, respectively.

"Broadcom is a bellwether for both the AI chip market and enterprise software, so this mixed report is causing some sector-wide reassessment," said Michael Brown, a portfolio manager at BlackRock.

Analyst Downgrades

Following the earnings release, several analysts revised their ratings on Broadcom. JPMorgan downgraded the stock from "overweight" to "neutral," citing the software headwinds and the unchanged AI forecast. "We need to see evidence of a software turnaround before getting more constructive," the note said. Meanwhile, Barclays maintained an "overweight" rating but lowered its price target from $1,200 to $1,100.

Outlook

Broadcom's management expressed confidence in the software division's long-term prospects, citing a pipeline of new products and cross-selling opportunities with VMware. However, they acknowledged that the near-term environment remains challenging due to enterprise budget constraints and the ongoing integration.

For the AI chip business, the company reiterated that it expects to capture a significant share of the custom chip market, which is projected to grow to $30 billion by 2027. Yet, the lack of an immediate forecast boost has left investors wanting more.

Key Takeaways

1. Broadcom stock fell 10% after reporting weak software sales, overshadowing strong AI chip demand.
2. The company left its full-year AI chip revenue forecast unchanged at $12 billion, disappointing investors.
3. Analysts downgraded the stock, citing concerns over VMware integration and enterprise software headwinds.

Sources: CNBC