Stock market today: Dow, S&P 500, Nasdaq sink to cap brutal week for tech stocks
Google's (GOOG) chip supplier Broadcom (AVGO) posted quarterly results after the bell that broadly beat Wall Street's expectations as orders from leading AI developer Anthropic (ANTH.PVT) surged to $21 billion. But profitability concerns are driving the stock down, analysts said Friday. Historically, most semiconductor makers operated like commodity businesses, as products were relatively undifferentiated, competition was intense, and profit margins were thin. The emergence of AI chips changed that dynamic. A small number of companies — particularly Nvidia (NVDA) — control the market with highly specialized chips that are in exceptionally high demand and short supply, allowing them to command premium prices and earn unusually high margins. But as more competitors enter the AI chip market and supply increases, some analysts worry that the economics could eventually start to resemble traditional semiconductor markets again, where chips behave more like commodities, companies' pricing power weakens, and their profits decline. "While all of these AI revenue figures are surging higher, the cost of this growth comes on margins..." wrote Deutsche Bank analyst Ross Seymore of Broadcom's results in a note to clients Friday. Broadcom guided for a gross margin of 76.9% for the current (January) quarter, which would mark a decline from 79% in the year-ago period. It would also be a step down from 77.9% in the fourth quarter and 78.3% in the third quarter — although these figures still represent extremely high profitability. Particularly, investors are worried Broadcom's additional $11 billion worth of orders from AI developer Anthropic for server racks equipped with Google's TPUs will have lower margins due to high pass-through costs (Broadcom is passing its manufacturing costs for the TPUs directly to Anthropic, without adding any markup or earning a profit on the orders). Wall Street remains bullish on Broadcom, overall. BNB Paribas analyst Karl Ackerman called the profitability worries "shortsighted" as "Broadcom’s transition to becoming a systems supplier should unlock a much bigger content opportunity." Bernstein analyst Stacy Rasgon also maintained bullish sentiment on the stock despite the selloff, which he attributed to broader "AI stock angst." "The company’s AI story continues to not only overdeliver but is doing it at an accelerating rate," he said.
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