AI revenue doubled, forecast soared. So why is the chip stock falling?

Alongside the surge recorded in revenues, Broadcom continued to present one of the highest levels of profitability in the industry. The company generated free cash flow of $10.3 billion in the quarter, meaning almost one dollar out of every two dollars that entered its coffers. The operating profit also remained extremely high.

But the market focused less on the impressive numbers and more on the question of whether they justify the high expectations built around the company. After months of enthusiasm from AI investors, it seems that even strong reports are no longer enough to impress Wall Street.

The engine of growth: the demand for AI chips

The main story in the reports was once again Broadcom’s artificial intelligence activity, which in recent years has become its most important growth engine. The company’s revenues from chips intended for AI applications amounted to $10.8 billion in the quarter, a jump of 143% compared to the corresponding period last year.

Behind the increase is the huge wave of investments by the technology giants in new data centers, designed to support the training and operation of artificial intelligence models. Beyond the chips themselves, Broadcom also enjoys growing demand for communication components that connect thousands of processors working together within the same data centers.

While Nvidia leads the market for artificial intelligence graphics processors, Broadcom has chosen to focus on a different niche: developing custom chips for large customers. It currently develops AI chips for six major clients, including Alphabet and OpenAI. One of its most prominent collaborations is with Google, within which it participated in the development of several generations of TPU chips, which are used by the company to operate its artificial intelligence services.

Optimistic forecast

The forecast provided by Broadcom for the next quarter also indicates that demand is still on the rise. The company’s CEO, Hok Tan, said that AI chip revenues are expected to reach $16 billion already in the third quarter, more than double compared to the same period last year. This forecast reflects the continued massive investments of the major technology companies in computing infrastructure, servers and data centers adapted to the age of artificial intelligence.

Broadcom is expected to benefit directly from these investments. Just this week, Alphabet announced that it will continue to increase its expenses in the field of artificial intelligence, after already estimating that its capital investments will reach approximately 190 billion dollars this year. Some of this money is expected to go to infrastructure providers such as Broadcom, which provide the chips and communication components on which the new data centers rely.

Alongside the chip business, Broadcom also owns a large software business built through acquisitions it has made over the years, first of all the VMware purchase. However, as artificial intelligence activity grows rapidly, the relative weight of the software division is decreasing. If a year ago the software accounted for about 42% of the company’s revenues, today most of the investors’ attention is directed to the chip and communication businesses, which have become Broadcom’s main growth engine in the AI ​​era.