Key Takeaways
\nShares of chip designer Broadcom tumbled on Friday as Wall Street focused in on margin pressure from its fast-growing AI business.Investors have scrutinized tech earnings more intensively in recent months amid concerns Silicon Valley is overspending on AI.<\/p>\n
Broadcom\u2019s custom AI chip business is growing rapidly. Wall Street, however, is wary about how much upside that growth suggests.\n<\/p>\n
Broadcom (AVGO<\/a>) on Thursday predicted its AI-related revenue will double year-over-year to $8.2 billion in the current quarter. That would be an acceleration from the most recent quarter, when it grew 74% to $6.5 billion. But the forecast came with a caveat\u2014and that weighed on the shares today. The stock was recently down about 10% in intraday trading.\n<\/p>\n Broadcom expects its gross margin to contract 100 basis points<\/a>, or 1 percentage point, quarter-over-quarter, \u201cprimarily reflecting a higher mix of AI revenue,\u201d said chief financial officer Kirsten Spears on a call with analysts Thursday night.\u00a0\n<\/p>\n Key Takeaways<\/p>\n Optimism about artificial intelligence has propelled tech stocks and the broader market to record highs this year. But mounting concerns about an AI bubble have made investors more cautious in recent months, pressuring shares of AI darlings in the process.<\/p>\n The notion that higher AI sales might be a drag on profitability wasn’t what investors wanted to hear. But investors have lately upped their scrutiny of tech earnings due to concerns about stretched stock valuations and unsustainable infrastructure spending, meaning that even good news is getting put under a microscope.\n<\/p>\n That’s led to less-than-rollicking market responses to corporate results. Nvidia (NVDA<\/a>), the leading supplier of AI chips and Broadcom\u2019s largest competitor, blew past estimates<\/a> with its numbers last month, but its stock slumped<\/a> under the weight of AI bubble concerns. Software giant Oracle (ORCL<\/a>) on Wednesday said its backlog now exceeds $500 billion, but it failed to convince investors<\/a> that its huge AI investments will pay off soon. Its stock slumped yesterday to lead an AI sell-off<\/a>. \u00a0\n<\/p>\n Broadcom, meanwhile, isn’t the only tech company whose profitability is being pressured by AI. In October, Oracle forecast its AI cloud infrastructure business would achieve gross margins between 30% and 40%, roughly half that of its legacy software business.\u00a0\n<\/p>\n