Key Takeaways
- Broadcom delivered record Q2 revenue of $22.2 billion, representing a 48% year-over-year increase, while AI semiconductor sales exploded 143% to reach $10.8 billion
- The company’s Q3 AI revenue forecast of approximately $16 billion fell short of some elevated analyst projections, sparking a share price decline exceeding 20% from its peak of $495
- Q2 operating margin achieved an all-time high of 67.3%, with management projecting it will remain near 67% for the upcoming quarter
- HSBC boosted its AVGO price target to $600 while reaffirming a Buy rating, highlighting ASIC revenue expansion and long-term contracts with Google, Meta, Anthropic, and OpenAI
- Analyst consensus on TipRanks shows Strong Buy, with a mean 12-month price target of $512.88, suggesting approximately 29% potential upside from today’s $396.60 level
Broadcom delivered exceptional Q2 financial results last week, yet shares experienced a dramatic selloff. The catalyst? AI revenue projections for Q3 that came in marginally below certain Wall Street forecasts, proving sufficient to trigger a decline of over 20% from AVGO’s peak of $495. Shares currently hover around $396.60.
It’s important to note: the outlook wasn’t actually weak. Leadership projected approximately $16 billion in AI semiconductor sales for Q3 — representing over 200% year-over-year growth — while reaffirming the company’s goal of exceeding $100 billion in AI revenue by Fiscal 2027. The issue was that market expectations had climbed to extraordinary heights.
Second quarter revenue reached an all-time high of $22.2 billion, climbing 48% compared to the prior year period. AI semiconductor revenue specifically soared 143% to $10.8 billion. AI bookings exceeded $30 billion during the quarter.
Free cash flow achieved a record $10.3 billion, representing 46% of total revenue. The firm’s debt-to-equity ratio improved to 0.74, down from 1.0 twelve months earlier and 1.65 two years prior.
Understanding the Margin Dynamic
One factor that contributed to investor concerns was gross margin contraction. Consolidated gross margin decreased 230 basis points year-over-year to 77.1%, with expectations for a further decline to approximately 74% in Q3.
However, context is critical. AI semiconductors generate lower gross margins compared to software products. As AI revenue becomes an increasingly dominant portion of Broadcom’s total sales, consolidated margins will naturally face downward pressure. This reflects a product mix evolution, not deteriorating profitability.
Operating margin presents a more encouraging picture: hitting a record 67.3% in Q2, with guidance pointing to approximately 67% again for Q3.
Infrastructure software revenue remained resilient, generating $7.2 billion in Q2, up 9% year-over-year, while maintaining gross margins approaching 93%.
HSBC Elevates Price Target to $600
On June 2, HSBC analyst Frank Lee increased his AVGO price target to $600 from $450, maintaining a Buy rating. Lee highlighted ASIC revenue momentum building throughout the latter half of FY2026 and extending into FY2027.
He emphasized that Broadcom will provide Google’s TPU v7 chips, which command higher average selling prices than the v6 generation. Meta is simultaneously scaling its proprietary ASIC production. Anthropic and OpenAI have been secured through multi-year commitments scheduled to commence in FY2026 and FY2027.
HSBC now projects Broadcom’s ASIC revenue at $46 billion for FY2026 and $100.2 billion for FY2027 — figures that stand 23% and 26% above Street consensus estimates, respectively.
Worries about Broadcom potentially losing Google’s TPU business in 2028 were also put to rest. HSBC referenced a supply agreement between both companies extending through 2031.
From a valuation perspective, AVGO trades at approximately 37.1x forward earnings. For comparison, Marvell trades at 65.3x and AMD at 62.5x.
TipRanks data reveals a Strong Buy consensus derived from 27 analyst evaluations over the last three months: 24 Buy ratings, 3 Hold ratings, and zero Sell ratings. The average 12-month price target is positioned at $512.88.
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