Broadcom’s Margin Warning Spooked Wall Street—But Cash Flow Could Still Win

Core Viewpoint - Investors are experiencing increased uncertainty regarding Broadcom, with shares declining nearly 14% since the fiscal Q4 2025 earnings report on December 11, primarily due to concerns over gross margin outlook and the impact of AI revenue on profitability [2][3][7] Group 1: Earnings and Market Reaction - Broadcom's post-earnings sell-off centers on whether the company's rapidly growing AI system revenue will dilute margins or enhance operating profit and free cash flow [2] - The stock has faced significant pressure following the earnings report, driven by forecasts of gross margin decline [7] Group 2: Gross Margin Concerns - Management anticipates a 100 basis point decrease in gross margin next quarter, projecting a decline due to a higher mix of AI revenue, which was at 78% last quarter [3] - The strategy of combining chips with third-party components to deliver systems increases total revenue but reduces overall margins due to added costs [4] Group 3: AI Backlog and Profitability - Broadcom has a $73 billion AI backlog expected to convert into revenue over the next 18 months, with $21 billion in orders from Anthropic likely being system sales, raising margin concerns [5] - Despite the anticipated gross margin deterioration, Broadcom expects only a slight decrease in operating margins in 2026, indicating confidence in maintaining free cash flow generation [6]