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)

| Metric | Reported | Estimate/Consensus|YoY Growth|Status |

|------------|-----------------|-------------------|-------------------|

| Revenue | $18.02 Billion | $17.45 Billion | +28%. |✅ Beat |

| Adj. EPS | $1.95 | $1.87 | +37% |✅ Beat |

| AI Revenue | $6.5 Billion | (Internal targets)| +74% |🚀 Surge|

| Adj. EBITDA| $12.12 Billiion | N/A | +34% |✅ Solid|

• 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).