AVGO Q1 Deep Dive: AI Semiconductor Demand Drives Revenue Surge, Market Reacts to Profitability Shifts

Fabless chip and software maker Broadcom (NASDAQ:AVGO) reported Q1 CY2026 results beating Wall Street’s revenue expectations, with sales up 47.9% year on year to $22.19 billion. On top of that, next quarter’s revenue guidance ($29.4 billion at the midpoint) was surprisingly good and 4.1% above what analysts were expecting. Its non-GAAP profit of $2.44 per share was 1.8% above analysts’ consensus estimates.

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StockStory’s Take

Broadcom’s first quarter results for 2026 exceeded Wall Street’s expectations for both revenue and profit, yet shares fell sharply as investors digested underlying trends. Management credited surging demand for AI semiconductors as the core driver of year-on-year growth, with CEO Hock E. Tan emphasizing that “AI semiconductor revenue reached a record $10.8 billion, up 143% year on year.” Margins benefited from scale and operating leverage, but the company noted that product mix shifts—particularly the growing share of lower-margin AI chips—tempered gross margin performance. Outgoing CFO Kirsten Spears highlighted that, despite robust operating performance, “gross margin was down 32 basis points year on year as semiconductor became a larger proportion of our product mix.”

Looking ahead, Broadcom’s guidance points to continued strength in AI-related semiconductors and infrastructure software, with management signaling a further acceleration in shipments to major cloud and AI customers. CEO Hock E. Tan stated that “AI semiconductor revenue is expected to double from the first half we shipped this year,” citing significant multi-year agreements with customers like Google, Anthropic, and Meta. Management remains focused on scaling production and ensuring sufficient supply to meet increasing demand, while also navigating anticipated margin impacts from the shifting business mix. The company expects operating margins to remain stable, even as gross margins fluctuate due to product composition.

Key Insights from Management’s Remarks

Management attributed the quarter’s performance to explosive AI semiconductor demand, large-scale customer contracts, and resilient infrastructure software sales, while also highlighting ongoing shifts in business mix and supply chain dynamics.

• AI Semiconductor Demand: Broadcom’s growth was fueled by a surge in AI semiconductor shipments, with bookings exceeding $30 billion in the quarter and shipments to customers like Google, Anthropic, and OpenAI. This demand is outpacing supply, leading to expanded contractual commitments and visibility through 2028.

• Major Customer Agreements: The company secured long-term, multi-generational chip supply agreements with key hyperscale and AI customers such as Google and Meta, solidifying its role as a foundational supplier for next-generation AI compute and networking infrastructure. CEO Tan described the agreement with Google as “a very substantial dollar amount.”

• Networking Product Leadership: Broadcom highlighted its position as a technology leader in AI networking, shipping its 100-terabit Tomahawk 6 Ethernet switch and preparing for next-generation products. Networking represented almost 40% of AI revenue this quarter, driven by demand for scalable compute clusters.

• Infrastructure Software Resilience: Infrastructure software revenue grew steadily, supported by strong bookings and the launch of VMware Cloud Foundation 9.1, which broadens support for AI workloads across diverse hardware environments.

• Margin Dynamics: Management acknowledged that the rapid growth of lower-margin AI semiconductor products is diluting consolidated gross margins, although strong operating leverage is supporting higher operating margins. Spears explained that “as the TPUs continue to accelerate, there will be pressure overall on margins,” but networking and software segments help offset this impact.

Drivers of Future Performance

Management expects AI semiconductor demand to remain the critical growth engine, but margin trends will be shaped by product mix and supply chain execution.

• AI and Hyperscaler Partnerships: Broadcom is scaling production to meet large, multi-year commitments from hyperscale cloud and AI companies. Management anticipates continued acceleration in AI chip shipments, with supply agreements providing revenue visibility through at least 2028. Tan indicated that “the amount of gigawatts required to measure compute capacity is growing very fast,” reflecting ongoing demand from leading AI labs.

• Margin Pressures from Mix: The increasing share of lower-margin AI semiconductors will continue to compress gross margins, even as operating margins remain stable due to efficiency and leverage. Spears noted that while semiconductor business growth outpaces software, “structurally, semiconductor margins remain very stable,” and overall profitability will depend on managing the mix between product lines.

• Supply Chain and Capacity Expansion: Management emphasized the importance of securing wafer and memory supply to fulfill rising customer orders, as well as potential use of additional foundry partners for flexibility. Tan stated that Broadcom is “very comfortable” with its ability to secure the necessary supply for 2026 and 2027 and is actively planning for further expansion into 2028 and 2029.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) the pace at which Broadcom ramps AI semiconductor shipments to fulfill large customer contracts, (2) the company’s ability to maintain or improve operating margins amid product mix changes, and (3) the ongoing adoption of VMware Cloud Foundation and related software offerings. Expansion of supply chain capacity and execution on long-term agreements will also be key signposts.

Broadcom currently trades at $413.67, down from $479.75 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free).

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