Last Update 13 Dec 25
Fair value Increased 32%Broadcom's Q4 Results: The Beat and Drop
Market Update: Broadcom (AVGO) Q4 Fiscal 2025 Results Date of Report: December 11, 2025
Below is an analysis of Broadcom’s latest financial results, the subsequent valuation impact, and the specific reasons behind the market's negative reaction.
1. Executive Summary: The "Beat and Drop"
Broadcom delivered a "double beat" for its fourth quarter of fiscal year 2025 (ending Nov 2, 2025), surpassing analyst expectations for both revenue and earnings. The company also raised its dividend by 10% and provided bullish revenue guidance for Q1 2026.
Despite these strong headline numbers, the stock experienced a significant sell-off (dropping ~5-11% in the following sessions). The decline was not driven by current weakness, but rather by concerns over future profitability margins and an investor base that had "priced in perfection" after a massive year-to-date rally.
2. Financial Highlights (Q4 FY2025)
- Revenue: $18.02 Billion (vs. $17.45 Billion est.)
- Growth: +28% YoY
- Status: ✅ Beat Estimates
- Adjusted EPS: $1.95 (vs. $1.87 est.)
- Growth: +37% YoY
- Status: ✅ Beat Estimates
- AI Revenue: $6.5 Billion
- Growth: +74% YoY
- Status: 🚀 Surge (Surpassed internal targets)
- Adjusted EBITDA: $12.12 Billion
- Growth: +34% YoY
- Status: ✅ Solid Performance
- Guidance (Q1 FY26): Revenue forecasted at ~$19.1B (vs. estimates of ~$18.3B).
- Dividend: Raised quarterly payout by 10% to $0.65/share.
3. Why Did the Share Price Decline?
The sell-off was a classic "Buy the Rumour, Sell the News" event, compounded by a specific structural concern regarding margins.
A. The Margin Compression Warning (Primary Factor)
The single biggest negative catalyst was management's guidance on Gross Margins.
- The Issue: Management warned that gross margins would likely contract by ~100 basis points (1%) in Q1 FY26.
- The Cause: This is due to a "mix shift." Broadcom is selling more AI chips (custom ASICs for clients like Google and Meta) and less of its traditional, ultra-high-margin legacy software/hardware. AI hardware, while growing explosively, carries lower margins than its mature software businesses.
- Market Reaction: Investors fear "profitless growth"—revenue is skyrocketing, but the profit per dollar of revenue is getting squeezed.
B. "Priced for Perfection"
- Context: AVGO stock had rallied ~75-128% over the trailing 12 months leading up to this report.
- Valuation Stretch: When a stock runs this hot, merely "beating" estimates isn't enough; the company needs to blow them out of the water and raise margin guidance. The margin guidance miss gave traders a reason to take profits.
C. Backlog "Disappointment"
- Broadcom reported an AI backlog of $73 billion.
- While objectively massive, "whisper numbers" (unofficial expectations among aggressive traders) were likely positioned for an even higher figure. In the current AI hype cycle, meeting official targets can sometimes be viewed as a disappointment relative to the most bullish scenarios.
D. The OpenAI Reality Check
- CEO Hock Tan clarified that Broadcom does not expect significant revenue from OpenAI in 2026. This poured cold water on speculative investors who were betting on an immediate, massive partnership contribution from the creator of ChatGPT.
4. Impact on Valuation
The pullback serves as a "valuation reset" rather than a thesis breaker.
- P/E Compression: The decline helps normalise the Price-to-Earnings (P/E) ratio, which had expanded significantly.
- Thesis Shift: The valuation narrative is shifting from "Growth at Any Cost" to "Scale vs. Margins." Broadcom is proving it can capture the AI volume (Revenue), but the market is now demanding proof that it can maintain its legendary efficiency (Margins) while doing so.
- Long-Term View: The fundamentals remain intact. Broadcom is effectively the "plumbing" of the AI revolution (networking + custom chips). The drop likely brings the stock closer to a fair value relative to its historical multiples, potentially offering a better entry point for long-term holders compared to the pre-earnings highs.
Analyst Consensus: Most analysts have maintained their "Buy" ratings but acknowledged that the next few quarters will be a "prove it" period regarding margin stability.
Based on the post-earnings updates from major financial institutions (as of December 12-13, 2025), here is the estimated fair value landscape for Broadcom (AVGO).
Bottom Line Up Front: The Fair Value Range
Despite the stock dropping to ~$360, the "Fair Value" consensus among top analysts has actually increased.
- Conservative / Model-Based Value: $305 – $365
- Analyst Consensus (Base Case): $460 – $480
- Bull Case (Aggressive Growth): $500+
Investment Implication: With the stock trading around $360, it is currently priced significantly below the updated analyst consensus (up to $480). This creates a "dislocation" where the market sentiment (fear of margin drop) has temporarily diverged from the fundamental analyst view (long-term profit growth).
1. Dual-Engine Growth: AI Semiconductors + Software
Broadcom is no longer just a chipmaker; it’s a full-stack AI and infrastructure provider, blending hardware and software seamlessly. Its ambition? To dominate AI-specific custom silicon and enterprise-grade cloud software.
On the hardware side, AI ASICs (XPUs) are flying off hyperscaler shelves—Broadcom is now serving seven hyperscale customers, up from just three last year. AI revenue hit $4.4B in Q1 FY2025, a stunning 77% year-over-year surge. Software-wise, the $69B VMware acquisition has morphed into a high-margin SaaS cash engine via VMware Cloud Foundation (VCF) and AI‑enabled virtualization tools like Tanzu CloudHealth.
2. Financial Powerhouse
Broadcom just smashed its Q2 FY2025 results:
- Revenue: ~$15.0B (+20% YoY)
- Gross Margin: ~68%
- Operating Margin: ~39%
- Adjusted EBITDA: ~$10 B (67% margin)
- Free Cash Flow: ~$19–20 B/year
- Shareholder returns: ~$7 B returned in cash and buybacks in Q2 alone
Impressive scale, excellent operating efficiency, and a fortress-level cash position.
3. Differentiated Tech & Moat
- Tomahawk 6 Ethernet chip launched mid‑2025 delivers industry‑leading 102.4 Tbps switching capacity—double anything else in the market.
- Broadcom’s chip design spans networking, storage, RF, and wireless, while many hyperscalers build in-house solutions. Sticky, mission-critical tech = high switching costs .
- VMware integration further entrenches Broadcom in enterprise IT stacks, offering scalable hybrid‑cloud and Private AI virtualization platforms.
4. Market Momentum & Institutional Credibility
- In 2025, Broadcom stock pulled in $24.5 B from top mutual fund inflows—eclipsing Meta ($7.1 B) and Nvidia ($5.3 B) .
- Analysts raised price targets: e.g., Mizuho bumped PT to $329 (from $315), while positioning shares among the most widely owned by hedge funds.
- Technical indicators show rising strength: 21‑day above 50‑day moving average, nearing 52‑week highs, Composite Rating of 98 (vs Nvidia’s 97).
5. Key Risks to Watch
- Valuation stretch: Trading around 45x forward P/E and ~32x free cash flow, elevated even for top-tier AI names.
- Customer concentration: Top 5 customers make up ~40% of revenue—makes results predictable but fragile .
- Supply chain & geopolitics: Heavy reliance on TSMC, U.S.–China trade frictions could hit deliveries or revenue from global hyperscalers
Investment Thesis Summary
Broadcom is a pick‑and‑shovel AI infrastructure giant disguised as a chip roll-up plus VMware boo. With dual engines—custom ASICs for hyperscale customers and high-margin software from VMware—it offers exposure to the AI boom with operational discipline and deep enterprise penetration.
If you want exposure to long‑term AI infrastructure (not just flashy GPUs) with strong cash flow and shareholder returns, Broadcom is one of the rare plays offering both scale and diversity.
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The user oscargarcia has a position in NasdaqGS:AVGO. Simply Wall St has no position in any of the companies mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The author of this narrative is not affiliated with, nor authorised by Simply Wall St as a sub-authorised representative. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimates are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.
