Can the explosive demand for Broadcom AI chips offset declining gross margins and sustain this massive stock rally?
How Is Broadcom AI Driving Revenue?
During the second quarter of fiscal 2026, **Broadcom AI** semiconductor revenue soared by an impressive 143% year-over-year. This hyper-growth segment now accounts for roughly 49% of the company’s total revenue, showcasing how quickly the chipmaker is transitioning into an artificial intelligence powerhouse. The company booked over $30 billion in AI semiconductor orders during the quarter, with $10.8 billion in shipments already completed.
This momentum is backed by long-term, multi-generation partnerships. For instance, Meta has secured a multi-generation MTIA XPU partnership with the company through 2028, and Mark Zuckerberg recently highlighted a massive rollout of custom silicon developed alongside Broadcom. Additionally, a long-term agreement with Google extends through 2031, providing the company with highly visible revenue streams. Management projects AI semiconductor revenue to reach $16 billion in the third quarter alone, representing over 200% year-over-year growth.
Why Are Gross Margins Declining?
Despite the explosive growth of the **Broadcom AI** division, some investors have expressed concern over a statistical contraction in gross margins. Consolidated gross margins dipped to 77.1% in the second quarter, down 230 basis points from the previous year, and are projected to fall further to 74% in the third quarter.
During a recent conference call with Citigroup analysts, CEO Tan Hock clarified that this decline is entirely due to a product mix-shift rather than structural margin erosion. While the software business—anchored by VMware—boasts a stellar 93% gross margin, it grew at a modest 9% year-over-year. In contrast, the lower-margin AI hardware segment is expanding at triple-digit speeds. Fortunately, operating margins have remained steady at a record 67.3%, proving that operating leverage is successfully offsetting the gross margin dip.
What Do Wall Street Analysts Think?
Wall Street remains divided on the long-term sustainability of the current infrastructure build-out. Goldman Sachs analyst Jim Covello has raised caution, arguing that the AI capital expenditure supercycle could be a one-time event. If major hyperscalers slow their spending to recover free cash flow, Broadcom’s impressive $30 billion quarterly booking pace could experience a meaningful slowdown. Other chipmakers like NVIDIA and Intel also face similar scrutiny regarding the long-term returns on these massive tech investments.
However, bulls point out that the stock currently trades at a forward price-to-earnings (P/E) multiple of 19x for fiscal year 2027. This sits comfortably below the company’s five-year average of 26x, suggesting that the market has not fully priced in the long-term earnings potential of the **Broadcom AI** pipeline. The company is targeting $56 billion in total revenue for fiscal 2026 and aims to cross the $100 billion threshold in fiscal 2027.
Related Coverage
For investors tracking the broader semiconductor landscape, keeping an eye on industry partnerships is essential. Read our analysis on the Broadcom Partnership Drops -3.5% Despite Massive Apple Deal to see how recent market sell-offs have impacted the company despite high-profile collaborations. Additionally, check out how other legacy chipmakers are faring in Intel Earnings Surge +3.7%: Can Apple and Tesla Deals Spark a Rally? to understand the competitive dynamics shaping the sector.
In summary, **Broadcom AI** remains the primary engine driving the company’s rapid transformation and robust market valuation. While gross margin compression and high customer concentration present short-term risks, the company’s massive order backlog and deep integration with hyperscalers offer a highly visible path to growth. For long-term investors, the current valuation discount relative to historical averages presents a compelling entry point into the backbone of the global artificial intelligence infrastructure.
