AVGO’s Gross Margin Contracts Sequentially: Is Growth Getting Harder?
Broadcom’s AVGO gross margin has contracted sequentially in the trailing four quarters. In the first quarter of fiscal 2026, the company reported a gross margin of 77% compared with 77.9% reported in the fourth quarter of fiscal 2025, 78.4% reported in the third quarter of fiscal 2025, and 79.4% posted in the second quarter of fiscal 2025. On a year-over-year basis, fiscal first quarter gross margin contracted 210 basis points (bps) despite a 30 bps increase in the lower margin Semiconductor Solution segment gross margin. Gross margin for Infrastructure Software was 93% in the reported quarter.
Broadcom now expects second-quarter fiscal 2026 gross margin to be 77%, flat sequentially. Unfavorable product mix due to higher Semiconductor Solution revenues in comparison to Infrastructure Software is expected to hurt gross margin in the near term. AVGO’s Semiconductor business benefits from strong AI revenues, which surged 106% year over year in the first quarter of fiscal 2026. AI networking revenues grew 60% year over year and represented one-third of AI revenues, while AVGO’s revenues from custom accelerators (XPUs) jumped 140% year over year.
Broadcom expects a positive second-quarter fiscal 2026 performance, with AI revenues of $10.7 billion, suggesting a 140% year-over-year upsurge. AI networking is expected to accelerate in the second quarter of fiscal 2026 and grow to 40% of the total AI revenues, thanks to strong adoption of Tomahawk 6 switch as well as Broadcom’s 200G SerDes, which are capturing demand from hyperscalers. Semiconductor revenues are expected to be $14.8 billion, indicating 76% year-over-year growth. In comparison, Infrastructure Software revenues are expected to increase a modest 9% year over year to approximately $7.2 billion.
AVGO expects revenues of $22 billion, indicating 47% year-over-year growth for the second quarter of fiscal 2026. The Zacks Consensus Estimate for revenues is currently pegged at $22.02 billion, suggesting 46.8% growth from the figure reported in the year-ago quarter.
AVGO Faces Tough Competition in the Semiconductor Space
Broadcom is facing stiff competition from Advanced Micro Devices AMD and NVIDIA NVDA in the semiconductor space.
NVIDIA is benefiting from the strong growth of AI and high-performance accelerated computing. The growing demand for generative AI and large language models using GPUs based on NVIDIA’s Hopper and Blackwell architectures is aiding Data Center revenues. In the fourth quarter of fiscal 2026, revenues from Data Center jumped 75% year over year and 22% sequentially to $62.31 billion and accounted for 91.5% of revenues. NVIDIA’s non-GAAP gross margin of 75.2% reflected an improvement of 170 bps year over year, driven by lower inventory provisions. Sequentially, the non-GAAP gross margin jumped 160 bps as Blackwell ramped with an improved mix and cost structure. For the first quarter of fiscal 2027, NVIDIA expects non-GAAP gross margin to be 75% (+/- 50 bps).
AMD’s prospects are benefiting from strong demand for EPYC processors that power cloud and enterprise workloads. Emerging AI use cases and rapid adoption of agentic AI are generating demand for general-purpose compute infrastructure, benefiting EPYC demand. Apart from EPYC, AMD’s prospects are driven by strong demand for Instinct accelerators. The launch of the Instinct MI350 series that supports deployments powered by AMD CPUs, GPUs and NICs has strengthened AMD’s system-level capabilities. In the fourth quarter of 2025, Data Center revenues increased 39.4% year over year to $5.38 billion and accounted for 52.4% of total revenues. Non-GAAP gross margin expanded 290 bps on a year-over-year basis to 57%.
AVGO’s Share Price Performance, Valuation & Estimates
Broadcom shares have dropped 15.2% year to date, underperforming the broader Zacks Computer and Technology sector’s plunge of 11.5%.
AVGO Stock Outperforms Sector
Image Source: Zacks Investment Research
The AVGO stock is trading at a premium, with a forward 12-month price/sales of 11.44X compared with the broader sector’s 5.48X. Broadcom has a Value Score of D.
AVGO Stock Has a Stretched Valuation
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for the second quarter of fiscal 2026 earnings is pegged at $2.35 per share, up 7.8% over the past 30 days, suggesting 48.7% growth from the figure reported in the year-ago quarter.
Broadcom Inc. Price and Consensus
Broadcom Inc. price-consensus-chart | Broadcom Inc. Quote
Broadcom currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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