Broadcom Inc. (AVGO.US) plunged 13% due to AI guidance being misinterpreted! Wall Street's major banks called it "excessively pessimistic" and raised their target prices against the trend.

Despite delivering strong quarterly performance and raising future growth expectations, Broadcom Inc. (AVGO.US) faced investor selling on Thursday due to not further increasing the annual revenue outlook for its artificial intelligence (AI) business. As of the time of writing, the stock fell over 13% to $411.91, dragging down the semiconductor sector as a whole. NVIDIA Corporation (NVDA.US), Advanced Micro Devices (AMD.US), and Intel Corporation (INTC.US) also felt pressure on their chip stocks due to Broadcom Inc.'s sharp drop. Market concerns mainly stemmed from Broadcom Inc.'s management not raising the full-year AI-related revenue guidance. After experiencing the AI frenzy over the past two years, investors have significantly raised their expectations for AI concept stocks, and signs of any lack of further growth expectations could trigger profit-taking. However, several Wall Street institutions believe that the market reaction may be overly pessimistic. Bernstein analyst Stacy Rasgon pointed out that AI business revenue itself has strong volatility, and quarterly data alone cannot fully reflect long-term trends. He stated that Broadcom Inc. expects AI-related revenue to grow by around 200% year-on-year in the next quarter, and AI semiconductor business revenue is expected to surpass $100 billion by the 2027 fiscal year, which is still a very impressive growth rate. Rasgon believes that with several large projects entering the mass production stage, the growth momentum in the second half of 2027 will further strengthen and is expected to bring higher revenue levels in 2028. Meanwhile, software business and other non-AI semiconductor businesses will continue to provide stable growth support. Regarding concerns from some investors that the expansion of AI-specific chip (ASIC) business may compress gross margins, Rasgon said that although gross margins have slightly declined, operational leverage has effectively offset this impact. "Complaining about a decline in profit margins seems like nitpicking for a company that still maintains a gross margin of over 70%." Rasgon expects that Broadcom Inc.'s stock price may enter a consolidation phase in the next one to two quarters, but as the market shifts its focus to 2027, the company's growth story will regain attention. He pointed out that at present, Broadcom Inc.'s revenue and earnings per share growth rates exceed 50%, gross margin and operating profit margin are maintained above 70% and 60%, respectively, while the valuation is only at a forward price-to-earnings ratio of around a dozen times. Based on the above assessment, Bernstein maintains an "outperform the market" rating for Broadcom Inc. and raises the target price from $525 to $550. Goldman Sachs Group, Inc. analyst James Schneider stated that after the stock price sharply corrected, he tends to actively buy Broadcom Inc. stocks. He believes that optimism about Broadcom Inc.'s growth prospects for 2027 and beyond is mainly based on three reasons. Firstly, the company still expects AI semiconductor revenue to exceed $100 billion in the 2027 fiscal year, corresponding to approximately 10GW data center deployments. Secondly, management further disclosed the progress of multiple custom chip customer projects outside of Alphabet Inc. Class C, which are expected to see strong growth in the 2027 fiscal year. Thirdly, the company reiterated that it has secured critical component supplies to support future years' revenue growth and will not be affected by supply chain bottlenecks. Schneider maintains a "buy" rating and raises the target price from $500 to $525. In addition to Goldman Sachs Group, Inc. and Bernstein, several other investment banks have also expressed positive views. KeyBanc Capital raised Broadcom Inc.'s target price from $500 to $575; Mizuho Securities raised the target price from $480 to $530. However, some institutions have become more cautious. Macquarie downgraded Broadcom Inc. from "outperform the market" to "neutral" and gave a target price of $437.