Broadcom's 14% December Drop: A Tactical Entry Point or a Margin Warning?

Broadcom's stock fell a steep 14.1% in December, a sharp move that stands in stark contrast to a flat S&P 500. The catalyst was the company's fiscal fourth-quarter results, released on December 11. The numbers themselves were robust: revenue hit $18.0 billion, up 28% year-over-year, and adjusted earnings per share of $1.95 beat estimates. AI semiconductor revenue, a key growth driver, surged 74%.

Yet the market's reaction was dictated by what came next. Management's guidance for the upcoming fiscal first quarter created the core conflict. While projecting revenue of $19.1 billion-a solid 28% year-over-year increase-the company guided for adjusted EBITDA to be 67% of projected revenue. That marks a sequential decline from the 68% rate posted in the just-completed quarter.

This shift is the immediate concern. The drop is attributed to a change in product mix, as soaring custom AI chip sales-while highly profitable in absolute terms-carry lower gross margins than the company's infrastructure software business. The guidance implies a slight but tangible compression in profitability as the company scales its fastest-growing segment. For investors focused on margin trajectory, this forward-looking signal overshadowed the strong results, creating a potential mispricing between the stock's current price and its underlying growth momentum.

The Mechanics: Margin Pressure vs. AI Demand

The guidance shift is a direct result of Broadcom's massive, costly buildouts. The company is investing heavily to meet what CEO Hock Tan calls "insatiable demand" for compute-intensive AI services. This involves upfront costs for custom chip production and data center infrastructure, which are pressuring margins in the near term. Analysts see this as a "significant margin hit in the short term due to its costly buildouts". The 1-percentage-point drop in the EBITDA margin guidance to 67% of revenue is the accounting reflection of this investment cycle.

Yet the underlying demand remains extraordinarily robust. In the just-completed quarter, AI semiconductor revenue surged 74% year-over-year to $6.5 billion. That's not a sign of weakening; it's the fuel for the current investment. Management expects that momentum to continue, projecting AI chip sales for the current quarter to double from a year earlier to $8.2 billion. This shows the company is scaling its fastest-growing, most profitable segment at a blistering pace.

The forward view also supports strong growth. Broadcom's first-quarter revenue guidance of about $19.1 billion is notably above the analyst consensus of $18.27 billion. This implies management still expects a solid 28% year-over-year increase, driven by that same AI demand. The tactical setup is clear: the market is pricing in near-term margin pressure from these strategic investments, while the company's guidance and backlog suggest the underlying growth engine is firing on all cylinders.

The Setup: Valuation and Positioning

The recent price action confirms the tactical opportunity. Broadcom's stock has pulled back sharply, down 18.2% over the past 20 days and 3.9% over the past 5 days. This isn't a minor dip; it's a correction that has driven the share price down to around $330, bringing it back toward its 52-week low of $138.1. The move is recent and severe, creating a potential entry point for investors who see the sell-off as overdone.

Yet this pullback must be viewed in context. The stock remains up 40.6% over the past year, a powerful long-term trend that the recent volatility is disrupting. The correction is a classic "buy the dip" scenario within a strong uptrend, where the market is reassessing near-term margin pressure against the backdrop of robust growth. The setup is now one of elevated volatility, with the stock trading at a 1-day volatility of 3.99% and a recent low of $330.50.

From a valuation perspective, the pullback does little to change the premium. The forward P/E remains high at 80.9, and the price-to-sales ratio is 24.7. These multiples reflect the market's expectation for continued AI-driven growth. The tactical play hinges on whether the current price adequately discounts the near-term margin compression while still capturing the long-term growth trajectory. For now, the sharp move has reset the entry level, but the fundamental story of scaling AI demand remains intact.

Catalysts and Risks: What to Watch

The immediate test for Broadcom's stock is the upcoming first-quarter earnings report in March. That event will be the definitive catalyst to determine if the recent 14% pullback was an overreaction or the start of a longer correction. Investors will scrutinize the actual gross margin performance against the company's guidance for it to be approximately 67% of revenue. A result that holds steady or shows signs of stabilization would validate the tactical entry thesis. A wider-than-expected compression, however, would confirm the margin warning and likely trigger further downside.

A key risk is the broader sentiment in the AI infrastructure sector. The stock's sharp decline last month was not isolated; it happened alongside a sell-off in shares of Oracle, CoreWeave, and other companies tied to AI infrastructure. If this sector-wide volatility persists, Broadcom could face continued pressure regardless of its own execution. The market's recent jitters suggest that even stellar growth can be overshadowed by concerns over profitability and valuation in a crowded AI trade.

On the flip side, a positive signal would be management reaffirming the long-term AI revenue growth trajectory. The company's AI chip sales are projected to double from a year earlier to $8.2 billion this quarter, and its AI-related backlog stands at $73 billion. Any commentary that reinforces the sustainability of this demand and the strategic importance of the custom chip business would be critical for the stock's valuation. For now, the setup hinges on March's numbers resolving the tension between near-term margin pressure and the powerful, long-term growth engine.