Broadcom shares slump as revenue target fails to impress investors counting on AI boost

By Akash Sriram and Arsheeya Bajwa

(Reuters) -Broadcom's shares closed down 10% on Friday after the chipmaker's tepid revenue forecast spooked investors betting on robust demand for AI chips to drive strong growth.

Chipmakers are bearing the brunt of Wall Street's lofty expectations after a months-long rally in shares of semiconductor firms, as investors bet heavily on the hardware that supports generative AI technology.

Broadcom posted a big decline in quarterly revenue from its broadband and non-AI networking divisions on Thursday, while a hike in its annual forecast for AI chip sales failed to impress growth-hungry investors who have driven a more than 35% increase in its shares so far this year.

The drop in Broadcom's shares stems from "the lack of upside in estimates .. and outlook in AI revenue ... along with lackluster semiconductor segment revenue," said CFRA Research analyst Angelo Zino.

While the company increased its sales forecast for AI chips by $1 billion for the fiscal year ending October to $12 billion, the boost was in line with widespread expectations, Zino said.

The selloff in Broadcom's shares wiped out more than $73 billion off its market value at the close of the market.

Artificial intelligence-linked chips are still a bright spot for Broadcom, as Big Tech invests in the datacenter infrastructure necessary to move around the hoards of data used by AI models.

However, Broadcom's custom AI chip business could see lumpy growth due to its dependence on a limited number of customers spending large amounts of capital.

Broadcom does not name its three custom AI chip clients, but is reported to be behind Alphabet's TPU chips employed in the tech giant's datacenters.

Morgan Stanley analysts said Broadcom's AI revenue could be uneven, though it noted still-strong growth this year. The company's AI chip revenue is expected to rise 10% sequentially to over $3.5 billion in the current quarter.

The company's shares were valued at around 26 times forward earnings expectations compared to about 30 for AI chip giant Nvidia.

Other chip stocks such as Nvidia, Advanced Micro Devices and Micron Tech were relatively flat.

Revenue from Broadcom's semiconductor segment, which supplies products for data centers and networking, grew 5% year-on-year in the quarter ending July, but just 1% from the previous quarter.

The drop in Broadcom's stock adds to cooling market enthusiasm for artificial intelligence, even as Big Tech continues to invest in AI development.

Nvidia shares - a barometer for the AI rally - lost more than 7% last week while Broadcom dropped about 2% as Nvidia's lackluster forecast sparked a selloff.

Broadcom also reported a surprise net loss of $1.88 billion, ending an almost eight-year streak of recording a net profit, according to LSEG data. Analysts had estimated a net profit of $2.88 billion.

The unexpected loss could be attributed to the company relocating some of its intellectual property back to the United States, resulting in a huge tax hit, said Daiwa analyst Louis Miscioscia.

(Reporting by Akash Sriram, Arsheeya Bajwa and Zaheer Kachwala in Bengaluru; Editing by Krishna Chandra Eluri and Maju Samuel)