Broadcom's Q3 Results
Broadcom (AVGO) fell more than 6% (down 6.7% at one point) after reporting earnings late the prior day, dragging the broader chip space lower. The market saw the report as strong but not strong enough, which fed concerns already sitting around the stock.
The headline numbers beat. EPS came in at $3.32 versus $3.22 expected. Revenue grew 86% to $29.59 billion, up from just under $16 billion a year earlier, above expectations. Net income more than tripled to $13.09 billion, or $2.68 a share. Profit tripled and revenue nearly doubled.
Broadcom (AVGO) is one of the big winners of the AI boom. It designs custom chips for Google (GOOGL), OpenAI, and Meta (META). It began shipping the newest generation of Google (GOOGL) TPUs and OpenAI's "Jalapeno" chips, and says it is already building second and third generation chips for OpenAI. Custom chips for Meta (META) start shipping this current quarter.
Total semiconductor solutions revenue reached $20.84 billion, above expectations. The custom chip business made up 73% of the company's $16.7 billion in AI semiconductor revenue for Q3, a jump of more than 220% year over year. That $16.7 billion beat street consensus of under $16 billion and the company's own guide of about $16 billion even. AI semiconductor revenue is expected to grow to $21.7 billion in Q4.
Guidance and the Concerns
CEO Hock Tan said demand for semiconductors should keep going at least through the next two years. He set a goal to double AI revenue to $115 billion, above the street's $100 billion, with plans to double again in fiscal 2028 to $230 billion. The company also set a target of $30 in earnings per share by 2028, versus consensus of about $25.86 for fiscal 2028.
The problem is the current quarter. Q4 revenue guidance of $34.8 billion missed the more than $35 billion analysts wanted. That miss, along with worry about customer concentration, is what the market fixed on.
Split Sell-Side Reaction
Analyst notes ran in both directions. Macquarie upgraded Broadcom (AVGO) to outperform from neutral with a $490 price target, saying Anthropic purchases in fiscal 2028 will more than cover any losses from Google (GOOGL). Bank of America cut its price target to $460 from $530 but kept a buy rating; it adjusted estimates and lowered the multiple on recent contraction in sector multiples, which pushed the target down.
The Trade View
The pullback looks confusing given returns this good: revenue nearly doubling, AI chip sales tripling, and 2027-2028 AI demand described as very strong. The slight miss on next quarter is a very small risk. The whole AI trade got caught in a market tug-of-war. Oil prices are over $90, raising real inflation worry, which is rational to think about. A big jobs number lands the next day, and that feeds into interest rates. The AI trade is tightly tied to what rates do, and short-term stock market uncertainty hits the AI trade harder than most.
Given that short-term uncertainty, rather than buying the stock here, the idea is to sell a put and collect premium to enter at a lower level. The September $340 put trades at about $7.80 to sell. That means buying AVGO at about $333 if assigned. With the stock at $360 very recently, $333 looks like an attractive entry if put to it. If not assigned, you collect about 2% over a few weeks while nothing happens.
On the broader tape, the S&P was floating around 7,700 again with Broadcom (AVGO) down but the rest of the market higher. The session showed more rotation back and forth in a strong market with no conviction either way. At some point something breaks and all sectors move together, likely later in the year, once there is clarity on the war, on where oil settles, and on interest rate policy and whether inflation gets under control.
