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

Inference is Broadcom's true "home turf."

Capital markets typically anchor the AI chip narrative within NVIDIA's training ecosystem. However, an underestimated shift is underway, as more than 70% of AI data center revenue has moved from training to inference.

In inference scenarios, ASICs can compress the Total Cost of Ownership (TCO) by 30% to 40% compared to general-purpose GPUs, while significantly lowering power consumption.

Jensen Huang repeatedly emphasized during the last NVIDIA earnings call 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, with its AI semiconductor backlog surpassing $73 billion and some customers already securing capacity post-2028.

The key focal point of this earnings report is management's qualitative assessment of inference demand growth, which will determine if Broadcom's valuation narrative is undergoing a fundamental shift.

The flip side of surging revenue is a structural decline in gross margins. In the first quarter, the actual operating gross margin, excluding acquisition amortization, was 75.8%, indicating that quarter-over-quarter gross margins have already hit 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 share of the ASIC business; the foundry-like nature and customer bargaining power of custom chips dictate that they are inherently lower than Broadcom’s proprietary product lines, such as the Tomahawk high-end switching chips.

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

However, during this revenue structure transition, the gross margin bottleneck has become a focal point for concentrated attacks by bears around each earnings report. As this earnings report is delivered alongside profit guidance, management's stance on full-year gross margin guidance will directly determine the market's next direction. If they only emphasize surging AI orders while remaining evasive or reserved about gross margins, the high-valuation logic will face concentrated 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 as high as 93% to 94%.

In January 2026, China required domestic enterprises to gradually phase out more than a dozen U.S. cybersecurity software vendors, with Broadcom's VMware among them.

VMware's server virtualization platform is widely used in China; although policies are being implemented gradually rather than taking immediate effect, the cumulative impact is creating a slow but structural squeeze on the software business.

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

In this earnings report, the growth quality and regional revenue structure of the software business are also key metrics for the market to gauge VMware's resilience. The replacement process by domestic Chinese cybersecurity vendors is accelerating, and this structural gap will be difficult to bridge in the short term.

The company's operating and free cash flows are growing rapidly, with fiscal 2025 free cash flow reaching $26.9 billion, a 39% year-over-year increase, supporting a $10 billion share repurchase program and a steadily growing dividend. However, at its current valuation of approximately 58x forward P/E, this price level incorporates "priced-for-perfection" assumptions that the AI business will maintain a CAGR of over 40% for the next several years. If marginal demand growth slows, the scope for valuation compression will far exceed the magnitude of the adjustment to fundamentals themselves.

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

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