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AVGO Shares Drop 13% Post Q2 Results: Buy, Sell or Hold on the Dip?
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Key Takeaways
AVGO slid 12.6% after Q2 beats as guidance and long-term AI outlook didn't meaningfully rise.
Broadcom lifted FY26 AI semiconductor revenue view to $56B and reiterated over $100B AI revenue in FY27.
AVGO expects Q3 gross margin near 74% vs 77.1% as lower-margin AI chips grow, stoking profit worries.
Broadcom (AVGO - Free Report) shares dropped a massive 12.6% following its second-quarter fiscal 2026 results despite reporting strong revenue (beat the Zacks Consensus Estimate by 0.68%) and earnings (beat the consensus mark by 1.67%) beats, as investors appeared disappointed by the guidance and the lack of a meaningful increase to AVGO’s longer-term AI outlook. Broadcom raised its forecast for fiscal 2026 AI semiconductor revenues to $56 billion and reiterated expectations for more than $100 billion in AI revenues in fiscal 2027. However, this was not enough for investors who had anticipated an even larger upward revision given Broadcom’s record $30 billion in quarterly AI bookings, accelerating demand from hyperscale customers, and management's comments about “insatiable” AI demand.
Broadcom also guided for gross margin to decline to approximately 74% in the third quarter of fiscal 2026 from 77.1% in the fiscal second quarter due to a greater mix of lower-margin AI semiconductor revenues, raising concerns that profitability may not scale as quickly as revenues. The combination of margin pressure and guidance that failed to exceed bullish investor assumptions triggered a sharp post-earnings selloff. So, what should investors do with the AVGO stock post the dip? Let’s find out.
AVGO’s Strong AI Growth Boosts Competitive Prowess
Broadcom shares have jumped 21.1% in the year-to-date (YTD) period, outperforming the broader Zacks Computer and Technology sector’s return of 22.1%. Broadcom shares have been benefiting from rising AI revenues driven by strong demand for custom AI accelerators (XPUs) despite lower margins on the chips that are hurting the revenue mix. An expanding portfolio bodes well for AVGO’s prospects, which are expected to push up the shares.
AVGO’s prospect benefits from rising AI revenues. AI semiconductor revenue reached a record $10.8 billion in the fiscal second quarter, up 143% year over year, and Broadcom management expects it to rise to $16 billion in the fiscal third quarter, representing over 200% year over year growth. Management disclosed that AI semiconductor bookings exceeded $30 billion during the quarter, nearly three times quarterly AI shipments. CEO Hock Tan stated that visibility now extends through 2028, supported by commitments from major customers including Google, OpenAI, Anthropic and Meta Platforms. The company continues to receive large purchase orders and multi-gigawatt deployment commitments.
The company’s strong portfolio is expected to help it steer off stiff competition from NVIDIA (NVDA - Free Report) , Advanced Micro Devices (AMD - Free Report) and Skyworks (SWKS - Free Report) in the AI domain. NVIDIA is benefiting from strong demand for Hopper and Blackwell architectures, while AMD’s prospects are benefiting from strong demand for EPYC and Instinct processors. Skyworks is benefiting from growing demand for its solutions across edge IoT, automotive and infrastructure end markets, as well as the pending acquisition of Qorvo. Shares of AMD, NVIDIA and Skyworks have returned 144.3%, 17.2% and 26.1%, year to date, respectively.
AVGO Stock’s Price Performance
Image Source: Zacks Investment Research
Broadcom continues to gain market share in AI networking, driven by the first-to-market Tomahawk 6 switch at 100 terabit per second, as well as 200G SerDes, which are capturing demand from hyperscalers. New products like 3.5D XPU, 102.4T Ethernet switches with co-packaged optics, 400G/lane optical DSPs, 200G/lane Ethernet retimers and AECs, and PCIe Gen6 connectivity solutions are expected to drive growth. AVGO claims at least a one-generation lead in AI networking and highlighted that networking represented nearly 40% of AI revenues in the fiscal second quarter, creating a powerful complementary revenue stream for Broadcom.
AVGO’s Prospects Suffer From Multiple Challenges
Broadcom’s AI growth story is concentrated around approximately six large customers, including Google, OpenAI, Anthropic and Meta Platforms. Management repeatedly referenced these few customers as the primary drivers of future demand. The company is also suffering from elevated AI expectations, and any lag in AI deployment schedules, power availability constraints, customer spending moderation, or supply chain issues could lead to significant investor disappointment.
While AI semiconductor revenues are growing triple digits, infrastructure software grew only 9% year over year in the second quarter of fiscal 2026. The company is becoming increasingly dependent on AI semiconductors as the primary growth engine, which is a headwind for investors.
The Zacks Consensus Estimate for third-quarter fiscal 2026 earnings is pegged at $3.13 per share, down 2.2% over the past 30 days, indicating 85.2% growth from the figure reported in the year-ago quarter.
Consensus Estimate Trend
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for fiscal 2026 earnings is pegged at $11.47 per share, up a couple of cents over the past 30 days, indicating 68.2% growth from the fiscal 2025 reported figure.
AVGO Stock: Buy, Sell or Hold?
Broadcom shares are trading at a premium, as suggested by the Value Score of D.
In terms of the forward 12-month price/sales (P/S), AVGO is trading at 14.95X, higher than the broader sector’s 6.91X. Broadcom is also trading at a premium against peers, NVIDIA, AMD and Skyworks, shares of which are currently trading at 12.4X, 14.82X and 3.01X, respectively.
AVGO Shares Are Overvalued
Image Source: Zacks Investment Research
Broadcom’s expanding AI portfolio is expected to drive top-line growth. However, elevated AI expectations, decline in gross margin expansion, and customer concentration don’t justify AVGO’s current valuation.
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AVGO Shares Drop 13% Post Q2 Results: Buy, Sell or Hold on the Dip?
Key Takeaways
Broadcom (AVGO - Free Report) shares dropped a massive 12.6% following its second-quarter fiscal 2026 results despite reporting strong revenue (beat the Zacks Consensus Estimate by 0.68%) and earnings (beat the consensus mark by 1.67%) beats, as investors appeared disappointed by the guidance and the lack of a meaningful increase to AVGO’s longer-term AI outlook. Broadcom raised its forecast for fiscal 2026 AI semiconductor revenues to $56 billion and reiterated expectations for more than $100 billion in AI revenues in fiscal 2027. However, this was not enough for investors who had anticipated an even larger upward revision given Broadcom’s record $30 billion in quarterly AI bookings, accelerating demand from hyperscale customers, and management's comments about “insatiable” AI demand.
Broadcom also guided for gross margin to decline to approximately 74% in the third quarter of fiscal 2026 from 77.1% in the fiscal second quarter due to a greater mix of lower-margin AI semiconductor revenues, raising concerns that profitability may not scale as quickly as revenues. The combination of margin pressure and guidance that failed to exceed bullish investor assumptions triggered a sharp post-earnings selloff. So, what should investors do with the AVGO stock post the dip? Let’s find out.
AVGO’s Strong AI Growth Boosts Competitive Prowess
Broadcom shares have jumped 21.1% in the year-to-date (YTD) period, outperforming the broader Zacks Computer and Technology sector’s return of 22.1%. Broadcom shares have been benefiting from rising AI revenues driven by strong demand for custom AI accelerators (XPUs) despite lower margins on the chips that are hurting the revenue mix. An expanding portfolio bodes well for AVGO’s prospects, which are expected to push up the shares.
AVGO’s prospect benefits from rising AI revenues. AI semiconductor revenue reached a record $10.8 billion in the fiscal second quarter, up 143% year over year, and Broadcom management expects it to rise to $16 billion in the fiscal third quarter, representing over 200% year over year growth. Management disclosed that AI semiconductor bookings exceeded $30 billion during the quarter, nearly three times quarterly AI shipments. CEO Hock Tan stated that visibility now extends through 2028, supported by commitments from major customers including Google, OpenAI, Anthropic and Meta Platforms. The company continues to receive large purchase orders and multi-gigawatt deployment commitments.
The company’s strong portfolio is expected to help it steer off stiff competition from NVIDIA (NVDA - Free Report) , Advanced Micro Devices (AMD - Free Report) and Skyworks (SWKS - Free Report) in the AI domain. NVIDIA is benefiting from strong demand for Hopper and Blackwell architectures, while AMD’s prospects are benefiting from strong demand for EPYC and Instinct processors. Skyworks is benefiting from growing demand for its solutions across edge IoT, automotive and infrastructure end markets, as well as the pending acquisition of Qorvo. Shares of AMD, NVIDIA and Skyworks have returned 144.3%, 17.2% and 26.1%, year to date, respectively.
AVGO Stock’s Price Performance
Image Source: Zacks Investment Research
Broadcom continues to gain market share in AI networking, driven by the first-to-market Tomahawk 6 switch at 100 terabit per second, as well as 200G SerDes, which are capturing demand from hyperscalers. New products like 3.5D XPU, 102.4T Ethernet switches with co-packaged optics, 400G/lane optical DSPs, 200G/lane Ethernet retimers and AECs, and PCIe Gen6 connectivity solutions are expected to drive growth. AVGO claims at least a one-generation lead in AI networking and highlighted that networking represented nearly 40% of AI revenues in the fiscal second quarter, creating a powerful complementary revenue stream for Broadcom.
AVGO’s Prospects Suffer From Multiple Challenges
Broadcom’s AI growth story is concentrated around approximately six large customers, including Google, OpenAI, Anthropic and Meta Platforms. Management repeatedly referenced these few customers as the primary drivers of future demand. The company is also suffering from elevated AI expectations, and any lag in AI deployment schedules, power availability constraints, customer spending moderation, or supply chain issues could lead to significant investor disappointment.
While AI semiconductor revenues are growing triple digits, infrastructure software grew only 9% year over year in the second quarter of fiscal 2026. The company is becoming increasingly dependent on AI semiconductors as the primary growth engine, which is a headwind for investors.
AVGO’s Earnings Estimate Revision Shows Mixed Trend
The Zacks Consensus Estimate for third-quarter fiscal 2026 earnings is pegged at $3.13 per share, down 2.2% over the past 30 days, indicating 85.2% growth from the figure reported in the year-ago quarter.
Consensus Estimate Trend
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for fiscal 2026 earnings is pegged at $11.47 per share, up a couple of cents over the past 30 days, indicating 68.2% growth from the fiscal 2025 reported figure.
AVGO Stock: Buy, Sell or Hold?
Broadcom shares are trading at a premium, as suggested by the Value Score of D.
In terms of the forward 12-month price/sales (P/S), AVGO is trading at 14.95X, higher than the broader sector’s 6.91X. Broadcom is also trading at a premium against peers, NVIDIA, AMD and Skyworks, shares of which are currently trading at 12.4X, 14.82X and 3.01X, respectively.
AVGO Shares Are Overvalued
Image Source: Zacks Investment Research
Broadcom’s expanding AI portfolio is expected to drive top-line growth. However, elevated AI expectations, decline in gross margin expansion, and customer concentration don’t justify AVGO’s current valuation.
Broadcom currently has a Zacks Rank #3 (Hold), which implies that investors should wait for a more favorable point to start accumulating the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.