Broadcom AI surge squeezes margins despite $30bn quarterly bookings
Broadcom stock fell alongside a sector-wide AI sell-off even as the chipmaker posted $30 billion in quarterly AI bookings, highlighting a structural shift in its profitability profile.
Broadcom shares dropped more than 7% over the past week as a global rout in semiconductor stocks overshadowed a massive jump in the company's artificial intelligence business. The company recorded $30 billion in quarterly AI bookings as of the second quarter of fiscal 2026.
The broader selloff was driven by growing skepticism over whether hyperscaler capital expenditures can generate adequate returns. Investors are increasingly questioning if AI chip pricing is sustainable and if demand for processors and memory will hold if the technology fails to deliver expected profits.
Broadcom's underlying financial strength contrasts sharply with the market's cautious mood. The company generates $10.3 billion in free cash flow per quarter, providing a substantial buffer against sector volatility. Meanwhile, its AI semiconductor revenue surged 143% year-over-year, with AI chips now accounting for 49% of total revenue.
However, this rapid hardware expansion is structurally altering Broadcom's profitability profile. Consolidated gross margins fell to 77.1% in the second quarter, down 230 basis points from a year earlier. Management expects this compression to continue, guiding for a further drop to 74% in the third quarter.
During the earnings call, management identified the decline explicitly as a "mix-shift effect, not structural margin erosion." To offset the gross margin pressure, the company is relying on operating leverage. This strategy appears to be working, as operating margins remained steady at a record 67.3%.
The shift is creating a tension between Broadcom's legacy operations and its new growth engine. The infrastructure software business, which operates at a 93% gross margin and historically anchored the company's blended profitability, grew just 9% year-over-year. It represented 32% of total revenue in the quarter.
CEO Tan Hock pushed back against the narrative that Broadcom is transitioning into a pure-play AI semiconductor firm. Speaking to Citi analysts, he emphasized that AI is not disrupting software renewals. Instead, he argued that the high volume of CPU cores deployed alongside GPUs is actively accelerating VMware's business growth.
Management projects infrastructure software revenue will reach $8.9 billion in the third quarter, up 31% from a year ago, citing deep integration at the hypervisor layer as a protective moat. Yet the underlying math remains clear: AI semiconductor revenue is scaling in triple digits while software expansion is lagging significantly behind.
