AVGO shares fell 2% despite a 221% surge in AI revenue in the third quarter

Core Points

• The company raises its multi-year artificial intelligence revenue forecast
• The culprits of Thursday's share price decline
• Obtained 3 free stock e-books
• Fiscal third-quarter revenue increased 86% year-on-year to US$29.59 billion,$29.43 billion exceeded analyst expectations
• Sales of artificial intelligence-related chips surged 221% to $16.7 billion, with fourth-quarter forecasts pointing to $21.7 billion (Year-on-year growth of 236%)
• The company raised its artificial intelligence revenue target for fiscal year 2027 to US$115 billion and maintained its fiscal year 2028 forecast at US$230 billion.
• The fourth-quarter revenue forecast is US$34.8 billion, slightly lower than the Wall Street consensus of US$35 billion. Sparking a sell-off
• Shares fell about 2.2% before trading on Thursday; The Wall Street consensus rating remains a "strong buy" with an average price target of US$505.38

Analysis of AVGO's share price decline after its earnings report

AVGO reported impressive fiscal third-quarter results late Wednesday, but investors reacted negatively to the report. After volatile after-hours swings on Wednesday, shares fell about 2.2% before the market on Thursday.

Core financial indicators performed well. Third-quarter revenue reached $29.59 billion, a surge of 86% from the same period last year, exceeding Wall Street's forecast of $29.43 billion. Adjusted earnings per share were $3.32, above the forecast range of $3.22 to $3.24 and almost double last year's $1.69.

The artificial intelligence sector performed well. Compared with the same period last year, sales of artificial intelligence chips soared to US$16.7 billion, an increase of 221%, exceeding internal forecasts and analyst estimates. Management expects the indicator to reach US$21.7 billion next quarter, representing an annual growth rate of 236%.

Company raises multi-year artificial intelligence revenue forecast

Management has also upgraded its long-term timetable forecast. The semiconductor giant now expects artificial intelligence chip sales to reach US$115 billion in fiscal 2027, up from its previous target of more than US$100 billion. Looking ahead, the company expects this figure to double to about $230 billion by fiscal 2028.

CEO Hock Tan said current customer demand exceeds the company's manufacturing and supply chain capabilities, which provides credibility for these ambitious goals.

In the last quarter, Broadcom maintained its artificial intelligence forecast for fiscal year 2027 at US$100 billion, which triggered a sharp decline in its share price. This time, even if outlook improved, it failed to stop investors from selling.

The main culprit for Thursday's stock price decline

The problem is mainly focused on fourth-quarter forecasts. Management expects revenue to be $34.8 billion, a year-on-year increase of 93%, but slightly below Wall Street's consensus of about $35 billion. In addition, adjusted operating margin guidance of 66% was slightly below the expected 66.5%.

This small gap is enough to conceal excellent artificial intelligence performance.

The stock has also been under recent headwind pressure. AVGO is down about 26% from its all-time high in June. A quarterly disclosure revealed that the company could face lease commitments of up to $29 billion in connection with a data center investment fund established by Apollo and Blackstone, raising questions about potential demand dynamics.

In addition, Google reached a deal with Marvell in August to develop chips for part of its artificial intelligence infrastructure. Although Broadcom renewed its TPU partnership with Google in April, Minmin Electronics took on additional chip design work in its new role, reducing Broadcom's potential source of revenue.

The company creates custom artificial intelligence accelerator chips for Google Cloud, Meta Platforms and OpenAI. Google is its largest and oldest customer.

AVGO is up 6.5% so far this year. Mizuho Bank's Vijay Rakesh maintained its "Buy" rating and a price target of US$530 after the earnings report, predicting that artificial intelligence revenue will reach US$129 billion in fiscal year 2027 and US$235 billion in fiscal year 2028. TipRanks showed an average analyst price target of $505.38, implying a 37.6% upside potential.

The Wall Street consensus is "strong buy", which includes 23 buy ratings and 3 hold ratings.

The company's forward P/E ratio of 18.8 times is slightly above the S & P 500 average, which contrasts sharply with the premium valuations it enjoyed earlier this year.

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