By Zaheer Kachwala and Joel Jose
Dec 12 (Reuters) – Broadcom shares fell more than 11% on Friday after the chipmaker warned growing sales of lower-margin custom AI processors were squeezing profitability, sparking worries that the business may be less lucrative.
The warning on margin impact deepened investor jitters over Big Tech’s AI returns, a day after Oracle fell 10.8% due to high capital spending for a debt-funded AI infrastructure buildout.
Investor scrutiny of AI spending has intensified in recent months after a blistering tech-stock rally that pushed some valuations to record highs. Circular deals – where firms invest in their own customers – have also fanned fears of a bubble.
Still, several analysts said the AI potential remains intact, with stocks benefiting from the technology, especially chipmakers, set for big annual gains as the industry spends hundreds of billions to bring more capacity online.
Broadcom, whose services are crucial for companies looking to develop custom AI processors, has secured massive contracts this year, including $21 billion from Anthropic in the past two quarters for Google’s custom Ironwood chips. Despite the fall on Friday, its stock is up more than 57% for the year.
It trades at about 32 times enterprise value to forward core earnings, compared with 19.6 times for AI chip giant Nvidia and 30.2 times for Advanced Micro Devices. Nvidia shares are up 34% this year, while AMD has gained 83%.
“Right now, the spending intentions still seem so big by so many, hitting that panic button is premature,” said Ben Reitzes, analyst at Melius Research.
But Broadcom said its margins will be pressured through the year due to a higher mix of AI revenue. It has a $73 billion backlog that it expects to ship over the next 18 months.
If current losses hold, Broadcom is likely to shed more than $213 billion in market value.
“We attribute the selloff to commentary on gross margin dilution from AI chips. We aren’t concerned with this, given that these chips are operating-margin-accretive,” analysts at Morningstar said.
(Reporting by Alun John in London, Zaheer Kachwala and Joel Jose in Bengaluru; Editing by Amanda Cooper and Arun Koyyur)
