Behind Broadcom's robust earnings report: A trillion-dollar AI revenue forecast counters market skepticism over 2027 capex

Author | Eric

The global leader in AI ASIC chips and the second-largest AI chip giant$Broadcom (AVGO.US)$After-hours release of FY2026 Q1 earnings report, with after-hours share price rising over 5%. Let's take a look at how this earnings report turned out.

Overview of key metrics from FQ1 earnings report:

- Revenue19.31 billion US dollars, growing by30%, up 7% quarter-over-quarter, slightly higher than the market consensus expectation of 191.7 billion USD.

- GAAP gross margin68.1%, up 0.1 percentage points year-over-year and 0.1 percentage points quarter-over-quarter, higher than the market consensus expectation of 67.3%.

- GAAP operating margin44.3%, up 2.3 percentage points year-over-year and 2.6 percentage points quarter-over-quarter, higher than the market consensus expectation of 43.3%. Non-GAAP operating margin66.4%, up 0.5 percentage points year-over-year and 0.2 percentage points quarter-over-quarter, surpassing the market consensus expectation of 65.8%.

- GAAP net profitUSD 7.35 billion, growing by34%, down 14% quarter-over-quarter, surpassing the market consensus expectation of USD 7.05 billion. Non-GAAP net profitUSD 10.19 billion, growing by30%, up 5% quarter-over-quarter, slightly above the market consensus expectation of USD 10.05 billion.

FQ1 Business Performance Overview:

– Revenue from semiconductor solutions businesses represented by networking, wireless, broadband, storage connectivity, industrial, and XPU chipsUSD 12.52 billion, growing by52%, accounting for65%Overall gross margin of the semiconductor business.68%An increase of 0.3 percentage points year-on-year, operating profit margin.60%An increase of 2.6 percentage points year-on-year.

– AI semiconductor revenue within the semiconductor business, represented by networking chips and XPU chipsUSD 8.4 billion, growing by105%, other non-AI semiconductor revenue4.12 billion US dollars, year-over-yearRemain flat, with year-over-year growth in enterprise networking, broadband, and server storage, offset by a seasonal decline in wireless business.

- Revenue from infrastructure software businesses represented by VMware, Symantec, CA, and Brocade6.8 billion US dollars, growing by1%, falling short of market expectations, accounting for35%Overall gross margin of software business.93%Operating profit margin78%, increasing by 1.9 percentage points year-over-year, remains the highest-margin business segment for Broadcom.

Key highlights of this earnings report:

1. Increased shipments of networking chips and XPUs; management forecasts AI chip revenue to surpass 100 billion US dollars by 2027.

AI-related revenue this quarterUSD 8.4 billion, growing by105%, of which XPU revenue$5.6 billion, year-over-yearDoubling Growth, network chip revenue2.8 billion USD, growing by60%, accounting for1/3. Management expects Q2 network chip revenue growth to further accelerate, with its share of AI total revenue increasing to40%, implying that the Q2 network revenue growth will significantly outpace XPU on a quarter-over-quarter basis.

Currently, $Broadcom (AVGO.US)$ Among the six major XPU chip customers, publicly confirmed ones include $Alphabet-C (GOOG.US)$ 、 $Meta Platforms (META.US)$ , Anthropic, OpenAI, ByteDance, and $Apple (AAPL.US)$ are the other two rumored clients. Progress in custom AI accelerator ramp-ups among these customers has been very smooth. Strong demand is seen for Google's TPUv7 Ironwood, which is expected to maintain its growth trajectory through 2026, with even stronger demand anticipated for the next-generation TPU from 2027 onwards. Anthropic’s demand is projected at 1 GW for 2026 and over 3 GW from 2027 onward. Meta’s MTIA roadmap is proceeding well, with initial shipments already begun; it is expected that the next-generation MTIA will scale to several GWs by 2027. As for the other two clients (market speculation points to ByteDance and Apple), strong shipments have been observed this year, with expectations to more than double by 2027. OpenAI is forecasted to begin large-scale deployment of its first-generation XPU starting 2027, corresponding to over 1 GW of computing power.

Overall,Management expects AI chip (including XPU and networking chips) revenue to exceed 100 billion USD by 2027, the company stated that it has already secured all the required capacity for these key components for fiscal years 2026 through 2028.

2. Concerns over gross margin have temporarily eased, with significant operating leverage effects observed

The signal of a certain decline in long-term gross margin released by management last quarter was alleviated this quarter. Not only did the overall gross margin increase slightly year-over-year and quarter-over-quarter, but the semiconductor business's gross margin also improved year-over-year, while the operating profit margin showed a notable increase, highlighting operating leverage.

Additionally, the gross margin guidance provided by management for the next quarter indicates a flat quarter-over-quarter trend, rather than the market's concern of a quarter-over-quarter decline.

3. The guidance for AI in the next quarter exceeded expectations; AI quarterly revenue surpassed the 10 billion USD mark for the first time, though software guidance fell short of expectations

FQ2 total revenue is expected to be$22 billion, growing by47%, higher than the market consensus of 20.53 billion USD, with gross marginremaining flat quarter-over-quarter, adjusted EBITDA margin at 68%.

By segment, semiconductor revenue for FQ2 is expected to reachUSD 14.8 billion, growing by76%, surpassing the market consensus of USD 13.11 billion. AI-related revenue reachedUSD 10.7 billion, growing by140%, exceeding market expectations of USD 9 billion and breaking through the USD 10 billion mark in a single quarter for the first time. Non-AI revenue came in atUSD 4.1 billion, growing by2%, while software revenue wasUSD 7.2 billion, growing by9%, slightly below market expectations of USD 7.22 billion.

Although VMware's revenue grew by 13% year-on-year this quarter, total contract value (TCV) stood at USD 9.2 billion, down USD 1.2 billion from the previous quarter. Regarding market concerns about AI cannibalizing software, management clearly stated that Broadcom’s infrastructure software business has not been replaced or disrupted by AI; VCF cannot be bypassed or substituted. The growth of generative AI and Agentic AI will stimulate more demand for VMware.

Post-Earnings Options Strategy Outlook

Recently, the market has experienced significant macro volatility, compounded by the impact of earnings reports. As of pre-earnings release options market pricing, Broadcom's post-earnings stock price volatility is estimated at approximately 7%, with an implied volatility (IV) of 59%, which is at a relatively high percentile level. Combined with the after-hours stock price increase of about 5% following the earnings release, which was less than the market-expected volatility, short-term IV Crush is expected.

Considering the better-than-expected earnings data and Broadcom's management’s optimistic guidance for future AI semiconductor business, options strategy planning can be considered.

Strategy A: Positive on AI Semiconductor Guidance (Suitable for Trend Followers)

Bull Call Spread

Strategy Approach: Buy one call option with a lower strike price (Long Call), while selling one call option with a higher strike price (Short Call).

Expression of opinionsThe earnings report confirmed the high visibility of AI business, implying that the stock price could rise with fluctuations. This strategy offsets part of the purchase cost by selling the higher strike call, effectively limiting maximum risk while hedging against value erosion caused by post-earnings IV contraction. It is a robust choice to capture gradual stock price recovery.

Strategy B: Premium Harvesting in Volatile Markets (Suitable for Long-Term Shareholders)

Covered Call

Strategy construction method: On the basis of holding Broadcom common stock, sell out-of-the-money call options slightly above the current market price.

Expressed view: If it is believed that after experiencing a surge driven by positive earnings reports, the stock price will enter a range-bound consolidation period due to the drag from the software business, investors can use this strategy to earn additional option premiums. This not only reduces the cost basis of holding the underlying stock but also allows them to 'collect rent' in a volatile market by taking advantage of the high implied volatility environment.

Summary

Overall, Broadcom's earnings report alleviated short-term market concerns about gross margin contraction. Although the software business remains weak, management's robust guidance on AI chip demand through 2027 helps ease worries about slowing capital expenditure growth among hyperscale customers impacting AI chip demand.

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