Broadcom's AI Guide Missed. Google And Nvidia Fears Made It Worse
$Broadcom(AVGO)$
FY26Q2 Core Financial Indicators
– Revenue: $22.19 billion, up 48% YoY and 15% QoQ, slightly beating the market consensus estimate of $22.12 billion and exceeding prior guidance of $22.0 billion.
– Non-GAAP Gross Margin: 77.1%, down 2.3 percentage points YoY but up 0.1 percentage points QoQ. Non-GAAP Operating Margin: 67.3%, up 2 percentage points YoY and 0.9 percentage points QoQ, marking the fourth consecutive quarter of QoQ improvement.
– Non-GAAP Net Income: $12.07 billion, up 55% YoY and 19% QoQ, beating the market consensus estimate of $11.77 billion.
Revenue Breakdown by Platform
– Semiconductor Solutions revenue was $15.01 billion, up 79% YoY and equal to 68% of total revenue. AI was the main engine. CEO Hock Tan said Q2 semiconductor revenue from AI was $10.8 billion, up 143% YoY, driven by increasing demand for custom AI accelerators and AI networking.
– Infrastructure Software revenue was $7.18 billion, up 9% YoY and equal to 32% of total revenue. VMware continues to provide margin stability and cash flow, but the stock is increasingly being valued on AI semiconductor momentum rather than software resilience.
Three Things to Watch
The AI guide missed the real bar
Broadcom guided Q3 FY2026 revenue to about $29.4 billion, implying 84% YoY growth. That was above the consensus estimate cited by Reuters. The problem was the AI semiconductor guide. Management expects Q3 AI semiconductor revenue of $16.0 billion, up more than 200% YoY, but Reuters cited a Visible Alpha estimate of about $16.36 billion.
That is why the stock fell despite massive growth. The official guide was strong, but the real market bar was higher. Broadcom also did not raise its 2027 AI semiconductor revenue target of more than $100 billion. After a major AI-driven rerating, investors wanted management to raise the ceiling, not just confirm the existing roadmap.
Google diversification fears hit the custom chip story
Broadcom's custom AI chip story has long been tied to $Alphabet(GOOG)$
The market still focused on one important new line from management. When asked about Broadcom's share within Google, Hock Tan said Broadcom would like to win every design in the program, but also accepted that Google's AI compute growth means there will likely be some diversity of supply sources. That sounded like the first clear management acknowledgement that Google may diversify vendors over time. This does not mean Broadcom lost Google. It means the upside case now has to account for share dilution risk if Google brings more ASIC partners into future TPU generations.
AI networking is facing a bigger Nvidia problem
Broadcom's AI story is not only custom XPUs. AI networking is also a major growth driver. In Q2, networking represented almost 40% of Broadcom's $10.8 billion AI semiconductor revenue, implying roughly $4.3 billion of AI networking-related revenue. That is a large business, but it is still far smaller than Nvidia's latest reported data-center networking revenue of $14.8 billion.
The growth comparison is also uncomfortable. Broadcom's total AI semiconductor revenue grew 143% YoY in Q2, while Nvidia's data-center networking revenue recently grew 199% YoY and 35% sequentially. Nvidia's Spectrum-X Ethernet switches are also being adopted by major AI data center customers such as Meta and Oracle. Broadcom remains a key AI networking supplier, but the market is now treating networking as a competitive battlefield, not a guaranteed Broadcom monopoly.
Guidance
Broadcom guided Q3 FY2026 revenue to about $29.4 billion, implying 84% YoY growth. Management also expects Q3 Non-GAAP operating income to be about 67% of projected revenue and adjusted EBITDA to be about 68% of projected revenue. AI semiconductor revenue is expected to reach $16.0 billion, up more than 200% YoY.
In absolute terms, this is very strong guidance. The market reaction shows the issue was not the level of growth, but the size of the upside surprise. Investors wanted a bigger AI chip guide and an upward reset to the 2027 target.
Summary
Broadcom's quarter was fundamentally strong, but the stock had already priced in a much bigger AI surprise. Revenue, AI semiconductor sales, earnings and free cash flow all looked powerful, but the market wanted management to raise the ceiling.
The long-term AI story remains intact. Broadcom is still one of the most important custom AI chip and AI networking suppliers outside Nvidia. The near-term risk is valuation: when expectations are this high, even a strong quarter can trade like a disappointment.
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