Broadcom's Q3 AI chip revenue guidance misses expectations by $12 billion, shares fall 13%

Author: Ada, TechFlow by Shenchao

After market close on June 3 Eastern Time, Broadcom reported its second-quarter fiscal 2026 results ended May 3, 2026. In absolute terms, this was a record-breaking quarter: revenue reached $22.19 billion, a 48% year-over-year increase—the highest quarterly growth since January 2017—and adjusted EPS of $2.44, exceeding the consensus analyst estimate of $2.40. However, the market’s focus was not on Q2, but on Broadcom’s Q3 AI chip revenue guidance of $16 billion, representing over 200% year-over-year growth but falling nearly 7% short of the sell-side consensus estimate of $17.2 billion. This shortfall, combined with slightly below-consensus performance in the company’s software business, triggered a sharp market reaction.

According to Broadcom's official disclosure, AI semiconductor revenue in Q2 reached $10.8 billion, a 143% year-over-year increase, surpassing the company’s prior guidance of $10.7 billion provided in March. CEO Hock Tan stated in the earnings release that this quarter’s growth was driven by "dual demand for custom AI accelerators and AI networking."

By business segment, semiconductor solutions revenue was $15.009 billion, up 79% year-over-year, accounting for 68% of total revenue; of which AI semiconductor revenue now represents 72%, while non-AI semiconductor revenue reached $4.2 billion, up 6% year-over-year, with a backlog exceeding $6 billion, indicating a cyclical recovery. Infrastructure software revenue (i.e., VMware) was $7.178 billion, up 9% year-over-year, in line with the company’s own guidance but below the analyst expectation of $7.32 billion according to StreetAccount, a shortfall of approximately $140 million.

Profitability also remained strong. Adjusted EBITDA reached $15.2 billion, accounting for 69% of revenue and setting a new record; free cash flow amounted to $10.26 billion, or 46% of revenue; and cash balance at quarter-end stood at $19.63 billion, an increase of $5.4 billion sequentially.

Broadcom's Q3 guidance forecasts total revenue of $29.4 billion, an 84% year-over-year increase, surpassing the analyst consensus estimate of $28.54 billion; semiconductor revenue is guided at $20.5 billion, up 124% year-over-year. However, AI semiconductor revenue guidance of $16 billion is 7% below the sell-side consensus estimate of $17.2 billion aggregated by institutions such as LSEG, and even further below more optimistic buy-side expectations.

More critically, Chen Fuyang did not raise the fiscal 2026 AI chip revenue guidance during the earnings call. According to CNBC, he reiterated on the call that "the company expects this momentum to continue into fiscal 2027 and maintains its guidance of AI semiconductor revenue exceeding $100 billion." Bernstein analyst Stacy Rasgon commented that the Q3 AI revenue guidance weighed on Broadcom's stock price.

Adding the realized revenues of Q1 ($8.4 billion) and Q2 ($10.8 billion) to the projected revenues for Q3 and Q4, Broadcom's total AI chip sales for this fiscal year are expected to reach approximately $56 billion, leaving a gap of about $1.6 billion compared to the analyst consensus estimate of $57.6 billion.

Broadcom's stock reacted sharply after hours. After its earnings report was released at 4:00 p.m. Eastern Time on June 3, AVGO initially dropped about 5%; as guidance details were revealed during the earnings call, the decline continued to widen, with the stock plunging over 15% in after-hours trading before closing down 13.78%. Based on the pre-earnings closing price of approximately $479, the company lost over $270 billion in market value in a single day.

It is worth noting that capital markets were already preparing for significant volatility following Broadcom’s earnings report. According to multiple media sources, the options market had priced in an expected single-day post-earnings price movement of approximately 7.8%, significantly above the historical average. This pricing reflects investors’ dilemma: prior to the earnings season, Broadcom’s stock had rebounded more than 60% from its March low and had risen nearly 40% year-to-date in 2026, with a valuation of approximately 90 times earnings—far above the industry average of about 69 times for semiconductor peers.

Precisely due to these valuation concerns, the market has set an implicit threshold for Broadcom’s earnings report: a comprehensive, significant beat on expectations. Any guidance falling short of an explosive performance could trigger profit-taking.

For China’s A-share optical module sector, Chen Fuyang’s remarks on AI networking during the conference call may be more impactful than the overall AI guidelines.

According to Yahoo Finance, citing earnings call remarks, Chen Fuyang confirmed that AI network business accounted for "nearly 40%" of AI semiconductor revenue this quarter, but he also indicated that this proportion is expected to "normalize over time to around 30%, rather than remaining near 40%."

This is the first time Broadcom's management has clearly outlined a path for the decline in the contribution of its AI networking business. AI networking—including segments such as Ethernet switching chips and optical transceiver connection chips—corresponds to the downstream narrative underpinning the core revenue sources of China’s A-share optical module leaders: InnoLight, Eoptolink, and Fortune Optical. All three companies have seen significant stock price increases this year, with their combined market capitalization once surpassing that of Kweichow Moutai. InnoLight’s forward P/E ratio is approximately 66x, while Fortune Optical has reached 139x, with valuations based on expectations of sustained high growth in AI networking.

Chen Fuyang's latest statement implies that, even as demand for AI computing power remains robust, the network segment may be the first to reach its peak. If this signal is accepted by buy-side investors, the valuation premium previously enjoyed by China's A-share optical module leaders will face direct scrutiny.

Broadcom's guidance effect has begun to spill over. Marvell's after-hours stock price fell by approximately 9%, narrowing to about 6% as of this writing. Other companies in the AI networking/connectivity space, such as Astera Labs and Credo Technology, also faced pressure in after-hours trading. Notably, Marvell surged 32% in a single day on June 2 after NVIDIA CEO Jensen Huang called it "the next trillion-dollar company," and its stock rose another 3.73% on June 3. However, this afternoon's pullback signals a concentrated unwinding of the prior day's "NVIDIA premium."

For the Asian market, today’s key focus points are two-fold. First, whether the leading Chinese optical module stock, Yizhongtian, can absorb Chen Fuyang’s remarks regarding a decline in network share. Second, whether Korean HBM suppliers such as SK Hynix and Samsung Electronics will be affected by the overall cooling of the AI narrative. Given that Zhongji Xuchuang’s single-day trading volume on June 2 accounted for more than half of the entire A-share sector’s daily turnover, market sentiment could be significantly amplified.

However, the earnings report itself did not negate the long-term bullish outlook for AI computing power. Chen Fuyang reiterated on the earnings call that demand for AI chips remains "unmet" and reaffirmed the company’s target of generating over $100 billion in AI chip revenue for fiscal year 2027. Similarly, after Broadcom’s recent earnings report last December, institutions like UBS entered a "buy the dip" mindset following a comparable pullback. Whether this current correction marks a turning point in the narrative—or simply a routine profit-taking by overvalued stocks—will depend on future earnings calls from leading companies and capital expenditure trends from hyperscale cloud providers.