Broadcom warns margins will suffer as AI revenue surges, shares plunge

Broadcom Inc. reported stronger than expected quarterly revenue on December 12, 2025 driven by surging demand for AI products, but its management cautioned that a shift toward lower margin AI processors and systems would depress near term profitability and sparked a sharp market reaction.

The chip maker said AI related revenue was expected to double year over year to $8.2 billion in the current quarter, up from $6.5 billion in the most recent quarter, which itself had risen 74 percent quarter over quarter. Broadcom also disclosed a backlog of $73 billion it expects to ship over the next 18 months, underscoring robust demand even as profitability expectations were revised.

Chief Financial Officer Kirsten Spears told analysts the company expected Q1 consolidated gross margin to be down approximately 100 basis points sequentially, “primarily reflecting a higher mix of AI revenue.” Management added that consolidated gross margins through the year would be affected by the revenue split between Infrastructure Software and Semiconductors and by product mix within Semiconductors. Chief Executive Officer Hock Tan said revenue from Broadcom’s non AI chip business was expected to decline sequentially in the current quarter because of weak demand, and that non AI revenue would be roughly flat year over year.

Markets responded quickly. Reuters reported shares fell nearly 6 percent before the opening bell, while other snapshots put intraday declines at roughly 10 percent and one report cited an 11 percent drop. If the pre market losses had held, Reuters calculated Broadcom would have lost more than $110 billion in market value. Shares initially rose after the earnings release in after hours trading but fell after Spears’ post earnings margin comments, according to Seeking Alpha.

Analysts gave mixed takes on the selloff. Morningstar analysts attributed the decline chiefly to commentary on gross margin dilution from AI chips, but they said they were “not concerned with this, given that these chips are operating margin accretive.” Other market observers pointed to investor anxiety over timing and scale of AI commitments from major customers, and some noted renewed questions about revenue contributions from partners such as OpenAI.

Broadcom’s warning fed broader tech weakness, following a heavy decline at Oracle a day earlier after that company disclosed heavy, debt funded AI infrastructure spending and negative free cash flow projections. The episode helped drag major indexes lower, with reports citing the Nasdaq down about 1.7 percent and the S and P 500 off about 1.1 percent during the trading session as volatility and rising bond yields added pressure.

The company’s results underline a fundamental tension in the AI era as firms scale custom chips and systems. Rapid top line growth can come at the cost of lower gross margins in the near term, leaving investors to weigh short term profit dilution against potential operating margin gains as production scales and higher margin software and services streams mature. Broadcom provided a clear quarterly projection tying a roughly 100 basis point sequential margin decline to a larger AI revenue mix, but it offered no new long term margin roadmap, leaving the market to debate how quickly returns will follow the spending surge.