Google (GOOG) chip supplier Broadcom (AVGO) released quarterly results after the bell, significantly beating Wall Street expectations, and orders from leading artificial intelligence developer Anthropic (ANTH.PVT) surged to $21 billion. But analysts said on Friday that concerns about profitability were driving the stock lower.
Historically, most semiconductor manufacturers have operated like commodity businesses, with relatively undifferentiated products, fierce competition, and razor-thin profit margins.
The emergence of artificial intelligence chips has changed this dynamic. A handful of companies — notably Nvidia (NVDA) — control the market with highly specialized chips that are in particularly high demand but in short supply, allowing them to control premiums and earn unusually high profits.
But as more competitors enter the AI chip market and supply increases, some analysts worry that the economy may eventually start to resemble the traditional semiconductor market again, with chips acting more like commodities and companies having less pricing power and lower profits.
“While all these AI revenue numbers are soaring, the cost of this growth comes in margins…” Deutsche Bank analyst Ross Seymour wrote of Broadcom’s results in a note to clients on Friday.
Broadcom expects gross profit margin for this quarter to be 76.9%, down from 79% in the same period last year. This would also be down from 77.9% in Q4 and 78.3% in Q3 – although these numbers still represent extremely high profitability.
In particular, investors are concerned that Broadcom’s additional $11 billion order from artificial intelligence developer Anthropic for server racks equipped with Google’s TPUs will have lower profit margins due to higher pass-through costs (Broadcom passes the manufacturing costs of the TPUs directly to Anthropic, without adding any markup or making a profit on the orders).
Overall, Wall Street remains bullish on Broadcom.
BNP Paribas analyst Karl Ackerman called concerns about profitability “short-sighted” because “Broadway’s transition to a systems provider should unlock greater content opportunities.”
Despite the sell-off, Bernstein analyst Stacy Rasgon also maintained a bullish sentiment on the stock, which he attributed to broader “artificial intelligence stock anxiety.”
“The company’s AI story not only continues to over-deliver, it’s accelerating,” he said.
