Broadcom on Thursday night reported another strong quarter and better-than-expected guidance for the current quarter. Despite this, the club’s stock price lost its initial surge and fell sharply once the Q&A session began on the post-earnings conference call. Investors were clearly not satisfied with CEO Hock Tan’s answers to key questions. Revenue for the fourth quarter of fiscal 2025, which ended Nov. 2, rose 28% from a year earlier to $18.02 billion, beating the consensus estimate of $17.49 billion, according to a consensus of analyst forecasts compiled by LSEG. Adjusted earnings per share rose 37% to $1.95, beating expectations of $1.86, according to LSEG data. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) for the quarter rose 34% to $12.22 billion, beating the FactSet consensus of $11.61 billion. Why We Own Our Company Broadcom is a high-quality semiconductor and software company run by an amazing CEO, Hock Tan. The company has benefited greatly from AI through its networking and custom chip businesses. Competitors: Marvell Technology, Advanced Micro Devices, and Nvidia Last Purchase Date: November 21, 2024 Start Date: August 24, 2023 Conclusion Broadcom’s reported results were strong, with revenue exceeding expectations, thanks to the strength of both of its business segments: Semiconductor Solutions and Infrastructure Software. Margin performance was also strong, with the company’s overall adjusted operating margin expanding by nearly 350 basis points (3.5 percentage points), leading to strong year-over-year earnings growth that exceeded what the Street had expected. In addition to the strong performance, the company’s revenue and EBITDA margin guidance for the first quarter of fiscal 2026 also exceeded expectations. Before I get into the parts of the call that rocked stocks, I want to emphasize that overall, Mr. Tan’s comments got us very excited for 2026. For starters, the CEO confirmed rumors that the fourth customer with the $10 billion order heard on the last call was indeed Anthropic, and that they were buying Ironwood XPUs, the 7th generation TPUs that Google’s Gemini 3 was trained on and ran on. XPU is the term Broadcom uses to describe custom chips, also known as application-specific integrated circuits (ASICs). Tan also noted that these TPUs are used by other companies, including club names such as Apple, Cohere, and SSI, adding, “The scale we see this happening could be significant.” TPU, or tensor processing unit, is what Google calls the chip it co-designed with Broadcom. Asked “What have you done for me lately?” Tan also noted that privately held Anthropic doubled in the reported quarter, placing $11 billion in additional orders for delivery in late 2026. If that wasn’t enough, Tan said Broadcom has secured a $1 billion initial order from a fifth XPU customer (whose name has not yet been disclosed), also scheduled for delivery in 2026. However, the conference call could result in margin pressure in the second half of fiscal 2026. CFO Kerstin Spears said, “In the second half of this year, we’ll start shipping more systems, and the picture is simple: You’re going to be passing through more components that aren’t ours. … Those costs are going to be going through more costs in the rack, so your gross margins are going to be lower.” So, back to the question of why the stock price, which soared more than 3% upon the announcement, gave up its gains and fell 4.5% in after-hours trading. It’s about concerns about Broadcom’s long-term partnership with Google’s parent company, Alphabet, and perhaps its back half-margin story. The Q&A portion of the call began with questions about the possibility of XPU customers looking to do more in-house development and what that means for Broadcom in the coming years. Tan responded by discussing the benefits of custom semiconductors and pointing out that what can be built into purpose-built hardware can only be coded through software using other solutions. He continued, “Will it mean that over time they’ll all want to do it themselves? Not necessarily. In fact, as technology in silicon continues to update and evolve, where do you put your resources if you’re an LLM (Large-Scale Language Model) player to compete in this space? In particular, merchant GPUs that don’t slow down at the end of the day. So I call this concept of customer tools a far-fetched hypothesis, but frankly I don’t think that’s going to happen.”Customer tools refer to the idea that companies are going to develop their own in-house designed custom hardware accelerators for AI training and inference, without the help of Broadcom. Tan’s reference to GPUs (graphics processing units) was intended to highlight the competitive environment that customer chips face with these gold standard multi-purpose chips dominated by club name Nvidia. Stock sellers may have taken Tan’s comments as a bit negative and not the concrete answer they were hoping for: “That’s not happening.” That said, we appreciate Tan because he provides a serious take on things, regardless of what he thinks Wall Street wants to hear. At this point, this hypothesis is certainly speculative and, in our opinion, it was clear that Mr. Tan did not think this scenario would play out. As it turns out, Thursday’s after-hours decline was more due to investor concerns about a potential future bear scenario in which a major customer moves development in-house, rather than anything tangible impacting Broadcom’s business outlook. After all, we’ve seen companies with financial wherewithal to move more chip development in-house, so this is a legitimate concern. But at this point, that’s just speculation, and we don’t think it’s enough to get us out of our position given the clearly strong demand that Broadcom is seeing now and the expected increase into 2026. If margin commentary is the reason for the stock price decline, that’s an opportunity. Because ultimately, more business means more revenue growth, even if your gross margins are low. And that is the basis for evaluating our stock value. AVGO YTD MOUNTAIN BROADCOM YTD Still, the possibility of future problems was enough to send the stock lower, especially as investors look to make huge profits in mid-December and lock in profits by the end of the year. Broadcom stock is up 75% since the beginning of the year as of Thursday’s close and is trading near its all-time high in the paper. This decrease doesn’t seem like much more to us. In honor of this year’s bull market, we reiterate our 2 rating on Broadcom stock and will look for better opportunities to raise it to a 1 rating, which equates to a Buy, if this decline continues in future sessions. However, since Wednesday’s all-time high closing price of approximately $413 was higher than the previous PT, we are raising our price target from $415 to $425 per share. Segment Commentary According to FactSet, Broadcom’s fourth-quarter fiscal year revenue in Semiconductor Solutions, by far the largest of its two business segments, rose 34.5% year over year to $11.07 billion, beating expectations of $10.77 billion. Among the results, AI semiconductor sales rose 74% year-over-year to $6.5 billion, surpassing the $6.22 billion the team had targeted months earlier after the third-quarter earnings release. AI networking is booming again, and Tan noted that customers continue to build out their data center infrastructure before deploying AI accelerators. As a result, the AI Switch backlog now exceeds $10 billion, the CEO said, adding that the Tomahawk 6, which is unmatched in performance, is being booked at a record pace. Adding in other components needed to build an AI data center, such as XPUs, Broadcom expects its AI backlog to exceed $73 billion, with XPUs accounting for approximately $53 billion. Tan expects the team to convert that into realized revenue over the next 18 months, with $8.2 billion realized in the current first quarter of 2026. For legacy semiconductor subunits, sales of $4.6 billion in the fourth quarter were up 2% year over year and 16% sequentially, “due to favorable wireless seasonality,” Tan said. The seasonality he’s referring to is the launch of the iPhone 17, which met strong demand. Tan added that businesses remain under pressure as broadband revenues continue to recover, wireless is flat compared to the same period last year, and “spending continues to show limited signs of recovery.” Revenue from Broadcom’s other business unit, Infrastructure Software, rose about 19% year over year to $6.9 billion, beating consensus estimates of $6.72 billion, according to FactSet. “Bookings remained strong as total contracts booked in the fourth quarter exceeded $10.4 billion, compared to $8.2 billion in the same period last year,” Tan said on the conference call. As a result, software infrastructure backlog ended the quarter at $73 billion, up significantly from $49 billion in the year-ago period. Guidance For the first quarter of fiscal 2026, ending February 1, Broadcom projected total revenue to be approximately $19.1 billion. This target exceeds the LSEG consensus of $18.27 billion. Importantly, AI revenue is expected to continue to grow in the coming quarters, with Tan saying in the release, “We expect this momentum to continue in the first quarter, with custom AI accelerators and Ethernet AI switches expected to double AI semiconductor revenue to $8.2 billion year-over-year.” Adding in the approximately $4.1 billion expected for the legacy semiconductor business, the outlook for the semiconductor solutions segment is approximately $12.3 billion, well above the consensus estimate of $11.53 billion, according to FactSet. However, first-quarter infrastructure software sales guidance of $6.8 billion fell short of FactSet’s forecast of $7.136 billion. The company expects fiscal first-quarter adjusted EBITDA to be about 67% of revenue estimates, or $12.78 billion, beating the 66% margin and consensus estimate of $12.06 billion, according to FactSet. (The Jim Cramer Charitable Trust is long AVGO, AAPL, NVDA. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. 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