Core Viewpoint - The market reaction to Broadcom's (AVGO.US) and Oracle's (ORCL.US) earnings reports was considered an overreaction, with UBS raising its revenue expectations for Broadcom's AI semiconductor business, projecting revenues to exceed $60 billion in fiscal year 2026, nearly tripling year-over-year [1][4]. Group 1: Earnings and Market Reaction - Broadcom's stock experienced a significant decline, losing 17% over two days following the earnings report [1]. - UBS held an investor meeting with Broadcom's management, which led to an upward revision of performance expectations based on management's comments regarding AI semiconductor revenue [1][3]. Group 2: Order Backlog and Revenue Projections - The company reported an AI business order backlog of $73 billion, covering an 18-month period, but management indicated that actual delivery timelines would be closer to 12 months [4]. - In Q4, total order backlog increased by 50% quarter-over-quarter, with AI semiconductor orders doubling; excluding a new $11 billion order from Anthropic, the remaining backlog still increased by $20-25 billion, primarily from Google and Meta [4][9]. - Broadcom anticipates that the $21 billion rack order for Anthropic may be delayed until fiscal year 2027 due to preparation progress [4][7]. Group 3: Profit Margins and Business Segments - The company reaffirmed that the gross margin for its XPU business is approximately 55%, while the AI networking business has a gross margin of about 80% [5][8]. - The overall gross margin for the $21 billion revenue from racks is expected to fall within the 45%-50% range due to the inclusion of resale components [5]. - Broadcom's management expressed confidence that AI business revenue growth in fiscal year 2026 will exceed current market expectations, with revenue projections for fiscal year 2027 raised to $135 billion, surpassing market consensus by 2% [6][8]. Group 4: Market Dynamics and Strategic Outlook - Broadcom noted a trend where AI labs are capturing more market share that was originally expected to be enterprise-level AI markets, as companies increasingly opt for services from providers like OpenAI and Anthropic rather than fine-tuning large models themselves [10]. - The company is open to flexible monetization models for custom chips, including potential licensing agreements, which could enhance overall gross and operating profit margins [10].

Core Insights - Morgan Stanley's hardware team signals that investors should hold onto AI winner stocks rather than making large-scale rotations, emphasizing a structural shift where the "network infrastructure" sector is expected to outpace "compute" growth by 2026 [1][2] - The team estimates that AI-related companies currently have a valuation premium of only 26%, indicating that investor expectations for AI-driven profit growth are overly conservative, with actual growth projected to accelerate by 60%-80% [1][5] Investment Strategy - Following recent pullbacks, the team suggests that now is a good time to reassess AI investment portfolios, advocating for a "hold" strategy rather than a "full rotation" [2] Valuation and Growth Projections - AI business is expected to account for approximately 40% of revenue for AI-related companies by 2026, with a corresponding price-to-earnings ratio of about 35 times, suggesting that the market anticipates sustainable capital expenditure growth of only 30%, significantly lower than the projected 70% growth for 2024-2025 [5] - Early company outlooks indicate that AI will lead to an average revenue growth increase of 400 basis points and an average profit growth increase of 600 basis points, translating to a growth acceleration of nearly 60%-80% for industries previously thought to have only mid-single-digit growth [7] Structural Shift in Growth - A key viewpoint is that the growth of the network infrastructure sector is set to surpass compute growth, redefining the AI investment landscape [8] - AI switch revenue is projected to grow by 48% in 2026, 29% in 2027, and 25% in 2028, compared to overall data center switch industry growth rates of 23%, 19%, and 18% respectively, indicating that AI is becoming the primary growth driver in the switch industry [8] Capital Expenditure Trends - With the expansion of GPU clusters, the revenue from AI data center switches is expected to rise from 4% of the total switch market in 2022 to 57% by 2027, driven by larger cluster demands and the urgent need for optimized GPU utilization [10] - The optical interconnect market is expected to grow by 40% to $20 billion by 2026, maintaining a compound annual growth rate of 20% before 2030, while the telecom and data center interconnect market is projected to grow by about 15% to $5 billion by 2026 [12] Recommended Stocks - Morgan Stanley places network-related companies at a high ranking in their recommendations, with Arista Networks and Amphenol as top picks, followed by Celestica, Coherent, and Lumentum [16] Supply Chain Considerations - Despite the optimistic outlook, the team highlights supply chain constraints as a key issue for 2026, with bottlenecks expected in HBM inventory, CoWoS packaging, and optical component capacity [17] - The team maintains a positive outlook on AI infrastructure investment, forecasting that capital expenditures for large-scale vendors will exceed $150 billion in 2026, marking a historical high [17]

Core Viewpoint - Broadcom (AVGO.US) and Oracle (ORCL.US) experienced significant stock price fluctuations following their earnings reports, with Broadcom's stock dropping 17% over two days. UBS believes the market's reaction was an overreaction and has raised its revenue expectations for Broadcom's AI semiconductor business for fiscal year 2026 to over $60 billion, nearly tripling year-on-year growth, and adjusted the target price from $472 to $475 [1] Group 1 - The company disclosed an AI business order backlog of $73 billion, covering an 18-month period, but management indicated that the actual delivery timeline would be closer to 12 months [2] - In Q4 (ending October), the total order backlog increased by 50% quarter-on-quarter, with AI semiconductor orders doubling. Excluding the new $11 billion order from Anthropic, the remaining backlog still increased by $20-25 billion, primarily from Google and Meta, without including OpenAI's orders [2] - Broadcom expects the delivery of a $21 billion rack order to Anthropic to likely extend into fiscal year 2027 due to the preparation progress of power components, emphasizing that Anthropic is the only rack customer in the backlog [2][3] Group 2 - The company reiterated that the gross margin for its XPU business is approximately 55%, and for its AI networking business, it is around 80%. However, the overall gross margin for the $21 billion revenue from rack products is expected to fall within the 45%-50% range due to the inclusion of resale components [3] - Broadcom's management expressed confidence that AI business revenue for fiscal year 2026 will exceed current market expectations, raising the revenue forecast for fiscal year 2027 to $135 billion, which is 2% higher than market consensus, and increasing the earnings per share (EPS) estimate to $14.15, 1.7% above consensus [3][4] Group 3 - UBS noted that the $21 billion order from Anthropic may be delivered by the end of fiscal year 2026 and continue into the first half of fiscal year 2027, with a projected delivery of $15 billion in fiscal year 2026 and the remaining $6 billion in fiscal year 2027 [4] - The company expects the growth rate of AI business revenue in fiscal year 2026 to surpass that of fiscal year 2025, with a combined gross margin for AI business close to 60% [4][5] - Broadcom's enterprise order backlog increased from $110 billion to $162 billion, with AI-related orders doubling quarter-on-quarter [5] Group 4 - Broadcom addressed concerns regarding Google directly interfacing with foundries, stating that such a scenario is unlikely in the next five years, while emphasizing a long-term strategy to diversify its customer base to mitigate concentration risks [5] - The company noted a trend where AI labs are capturing more market share that was originally expected to be enterprise-level AI markets, as more businesses opt for services from companies like OpenAI and Anthropic rather than fine-tuning large models themselves [5][6] - Broadcom is open to monetizing custom chips through a licensing model if customer demand arises, which could lead to a reduction in the average selling price (ASP) related to Broadcom's IP, but potentially higher overall gross and operating margins [6]

Core Viewpoint - Broadcom's AI market sales outlook did not meet high investor expectations, leading to a decline in stock price after hours despite a significant backlog of AI product orders totaling $73 billion [1][9]. Group 1: Financial Performance - In fiscal year 2025, Broadcom achieved record total revenue of $64 billion, a 24% year-over-year increase, driven primarily by AI, semiconductor, and VMware businesses [3][26]. - AI business revenue grew by 65% year-over-year, reaching $20 billion, contributing significantly to the overall revenue growth [3][26]. - The fourth quarter saw record revenue of $18 billion, a 28% increase year-over-year, exceeding guidance due to strong performance in AI semiconductors and infrastructure software [9][34]. Group 2: AI Business Outlook - Broadcom currently holds a backlog of $73 billion in AI-related orders, expected to be fulfilled over the next 18 months, representing nearly half of the company's total backlog of $162 billion [5][31]. - The company anticipates that AI business revenue will double in the first quarter of fiscal year 2026, reaching $8.2 billion [5][31]. - The demand for AI networking products is robust, with over $10 billion in backlog orders for AI switches, driven by the deployment of data center infrastructure [14][30]. Group 3: Custom AI Chip Business - Broadcom has successfully secured its fifth XPU customer, with a $1 billion order, in addition to a $11 billion order from existing customer Anthropic, indicating strong market recognition for its custom AI accelerator solutions [11][5]. - The company emphasizes that the development of custom chips is a lengthy process, and there is no evidence suggesting a widespread shift towards customer-owned chip development [12][43]. Group 4: Non-AI Semiconductor Business - Non-AI semiconductor revenue for the fourth quarter was $4.6 billion, showing a 2% year-over-year increase, primarily due to seasonal benefits in the wireless business [19][31]. - The company expects non-AI semiconductor revenue to remain stable, with a forecast of approximately $4.1 billion for the first quarter of fiscal year 2026 [22][31]. Group 5: Shareholder Returns - Broadcom announced a 10% increase in its quarterly dividend to $0.65 per share and extended its stock buyback program [5][36].