Broadcom reports AI revenue jumped 143% year-over-year while custom silicon demand keeps demand far ahead of supply.

Broadcom stock reached an all-time high on June 3, but has since dropped 22%. The decline comes despite the semiconductor company's strong fiscal second quarter, which saw overall revenue surge 48% year over year to a record $22.8 billion. Net income rose 88% to $9.3 billion, and adjusted earnings climbed 54% to $2.44 per share, beating estimates.

The primary growth driver has been artificial intelligence. AI semiconductor revenue in the quarter ended May 3 jumped 143% year over year to $10.8 billion, surpassing forecasts. CEO Hock Tan attributed the gains to increasing demand for custom AI accelerators and AI networking.

Looking forward, Tan projects AI semiconductor revenue will rise more than 48% sequentially and 200% year over year to $16 billion in the fiscal third quarter. He also guided for full-year fiscal 2027 AI revenue of $100 billion, representing 78% year-over-year growth—though this fell short of analyst expectations given the company's $73 billion in AI backlog announced in early 2026, to be contracted over the ensuing 18 months.

The stock tanked 13% the day after earnings. Several factors contributed. On the earnings call, Tan noted that AI semiconductor revenue is projected to grow 180% year over year to $56 billion, but this implies fourth-quarter sequential growth of roughly 30%—slightly lower than anticipated for Q3. Additionally, gross margins are expected to compress from 77.1% in Q2 to 74% in Q3 due to increased sales of lower-margin AI chips.

The primary catalyst was profit-taking. At its peak, Broadcom stock had reached roughly $480 per share—up 38% year-to-date and 86% over the past 12 months—with a price-to-earnings ratio exceeding 80 times. Broader market concerns about high AI spending levels and flattening growth among AI stocks, combined with elevated valuations, added pressure.

The 22% decline has brought valuations to more reasonable levels. The current P/E ratio of 60 remains elevated, but the forward P/E has contracted to 19—attractive for a company with Broadcom's backlog and earnings power. The five-year PEG ratio stands at just 0.4, suggesting the stock is undervalued relative to long-term earnings potential.