Broadcom Inc. (AVGO.US) did not meet market's "strict high expectations": Q4 performance impressive but still declined, AI chip backlog orders failed to catch up with high valuation.

After announcing its fourth-quarter performance, Broadcom Inc. (AVGO.US) saw its stock price drop in after-hours trading, as the AI backlog orders disclosed by the chip maker were slightly below expectations. For the fourth quarter ending November 2, Broadcom Inc. reported sales of $18 billion, a 28% year-on-year increase, surpassing analysts' expectations of $17.5 billion. Excluding certain items, earnings per share rose to $1.95, compared to analysts' forecast of $1.87. The semiconductor segment generated revenue of $11.07 billion, a 34.5% increase year-on-year, while the infrastructure business saw a 19% growth, reaching $6.94 billion. Following comments by CEO Hock Tan during an analyst conference call, the company's stock price dropped by over 5% in after-hours trading, erasing earlier gains. Tan mentioned that the company currently has AI product orders worth $73 billion backlogged, to be delivered over the next six quarters a figure that disappointed some investors. However, Tan later clarified that this was just a "baseline". Tan stated, "We expect deliveries to increase significantly over the next six quarters as more orders come in. Therefore, depending on the specific product, our delivery cycles could range from six months to a year." While he mentioned that the company secured a $11 billion order from AI startup Anthropic PBC in the fourth quarter, he also cautioned that total profit margins were narrowing due to AI product sales. Tan disclosed that the $11 billion order signed with Anthropic in the fourth quarter was an addition to the $10 billion order from the previous quarter. He also revealed that Broadcom Inc. signed another customer order worth $1 billion, but did not disclose the customer's identity. Looking ahead, the company forecast first-quarter sales of around $19.1 billion as of February 1, compared to analysts' average estimate of $18.5 billion. First-quarter AI semiconductor revenue is expected to double year-on-year to $8.2 billion. The company also raised its quarterly dividend by 10%, to $0.65 per share. Broadcom Inc.'s stock has soared by 75% so far this year, as investors bet on the company becoming a major beneficiary of increased spending in the AI sector. However, this has pushed Broadcom Inc.'s stock valuation to historic highs, with a forward P/E ratio of approximately 42 times, compared to an average of 17 times over the past 10 years. Currently, Broadcom Inc.'s valuation is higher than all the companies in the "big tech seven" except for Tesla, Inc. Regardless of what the company says or reports, Broadcom Inc.'s hot stock valuation may have reached a critical point: even if performance greatly exceeds expectations, it could still become a reason for market selloffs. Broadcom Inc. has benefited from the demand for its custom chips in large-scale data center construction, allowing it to gain a larger share in the industry dominated by NVIDIA Corporation (NVDA.US). AI chip revenue for Broadcom Inc. in the last quarter grew by over 70%, an increase of over 10 percentage points compared to the previous quarter. Broadcom Inc. has recently received attention largely due to its partnerships with some major AI model providers. The developer of ChatGPT, OpenAI, signed an agreement with Broadcom Inc. to use its products in its AI chip design. As part of the deal announced by Broadcom Inc. in October, the manufacturer of ChatGPT will use custom chips and networking components to support its AI services. This deal will bring additional income to Broadcom Inc.'s custom chip division and further solidify its position in the flourishing AI market. Despite the growth in revenue from AI computing at Broadcom Inc., the company has lagged behind NVIDIA Corporation in the AI processor field. In another deal, Anthropic agreed to use computing services worth billions of dollars based on Alphabet Inc. (GOOGL.US) Google Cloud TPUs. The components of the latter also depend on Broadcom Inc.'s design, further fueling investors' enthusiasm for the chip maker's AI prospects. Emarketer analyst Jacob Bourne stated, "Given Alphabet Inc. Class C's standing, Broadcom Inc. stands to benefit from the increasing demand for specialized, energy-efficient chips, while its network product portfolio makes it a key provider supporting the construction of large-scale data centers for AI infrastructure." If Broadcom Inc.'s AI business can meet its long-term financial goals, CEO Tan stands to receive a hefty reward. If the AI business revenue reaches $90 billion by the 2030 fiscal year, Tan will receive 610,521 shares of Broadcom Inc. stock. Based in Palo Alto, California, the company has a wide product line encompassing communication chips, network components, and software. To increase revenue from the AI sector, Broadcom Inc. has been upgrading its network equipment to accelerate data transfer speeds within and between data centers. As AI models become increasingly complex, the ability to connect chips, server racks, and even entire data centers becomes increasingly crucial. Broadcom Inc. collaborates with mega cloud service providers such as Alphabet Inc. Class C and Meta Platforms (META.US) to design and manufacture custom AI processors (Application-Specific Integrated Circuits, ASICs), offering an important alternative to NVIDIA Corporation's GPU. Overall, this shows that Broadcom Inc. is well-poised to capitalize on the growing demand for specialized chips and infrastructure in the AI sector, with various partnerships and deals opening up new revenue streams for the company.