Broadcom Earnings Are Not Without Risk. Market Only Sees AI Demand But Overlooks Multi-Layered Structural Contradictions.

Capital markets are accustomed to anchoring the AI chip narrative within Nvidia's training ecosystem. However, an underestimated shift is occurring, with over 70% of AI data center revenue having transitioned from training to inference.

In inference scenarios, ASICs can reduce the total cost of ownership by 30% to 40% compared to general-purpose GPUs, while significantly lowering power consumption.

During Nvidia's last earnings call, Jensen Huang repeatedly emphasized that 'inference is becoming the primary workload.' Broadcom's custom chip orders for Google's TPU v7/v8, Meta, Anthropic, and OpenAI are locked in through 2028; the AI semiconductor order backlog has surpassed $73 billion, and some customers have even begun securing capacity beyond 2028.

The key focal point of this earnings report lies in management's qualitative assessment of inference demand growth, as it determines whether Broadcom's valuation narrative is undergoing a fundamental shift.

Behind the surge in revenue lies a structural downward trend in gross margin. In the first quarter, the actual operating gross margin, excluding acquisition-related amortization, was 75.8%, suggesting that quarter-over-quarter gross margin has reached a bottleneck.

The market expects semiconductor gross margins to potentially slide further from 65% to the 60%–62% range. The direct cause is the accelerating revenue contribution from the ASIC business; the foundry-like nature of custom chips and customer bargaining power mean their margins are inherently lower than Broadcom's proprietary lines, such as the Tomahawk high-end switching chips.

Broadcom is using its ASIC business to capture the incremental growth in AI computing power, while its Ethernet switching chips maintain a high-margin moat for its existing business, supplemented by the VMware software business (93% gross margin) as a profit buffer.

However, during this shift in revenue structure, the gross margin bottleneck has become a focal point for short sellers' concentrated attacks around each earnings report. As this quarter's results and earnings forecasts are released, management's guidance on full-year gross margins will directly determine the market's next move. If they only highlight surging AI orders while remaining evasive or reserved about gross margins, the high-valuation thesis will face intensive scrutiny from short-term capital.

VMware acts as a profit "shock absorber" within Broadcom's growth engine. Currently, the software business contributes approximately $6.8 billion in quarterly revenue, with gross margins reaching 93% to 94%.

In January 2026, China mandated that domestic enterprises gradually phase out more than ten U.S. cybersecurity software providers, with Broadcom's VMware among them.

VMware’s server virtualization platform is widely used in China. Although the policy is being implemented gradually rather than taking effect immediately, its cumulative effect is exerting a slow yet structural squeeze on the software business.

It is eroding the incremental growth space of the software business, causing Broadcom to lose a portion of its structural buffer from the software side while maintaining overall profit margin balance.

In this earnings report, the growth quality and regional revenue mix of the software business are also key data points for the market to gauge VMware's resilience. The substitution process by domestic Chinese cybersecurity providers is advancing rapidly, creating a structural gap that is difficult to fill in the short term.

The company's operating and free cash flows are growing rapidly, with free cash flow reaching $26.9 billion in fiscal year 2025, up 39% year-over-year, supporting a $10 billion share repurchase program and a steadily growing dividend. However, with its current valuation at approximately 58x forward earnings, this price reflects a "perfect" expectation that the AI business will maintain a CAGR of over 40% for the next several years. If demand growth slows at the margin, the room for valuation compression will far exceed the adjustment in the fundamentals themselves.

The real points of focus for investors are how the structural trend of inference displacing training is reshaping Broadcom's valuation framework, management's tolerance thresholds and hedging tools while rising ASIC market share continues to compress gross margins, and whether the software business can maintain growth quality amidst regional policy risks.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.