AVGO Q2 Deep Dive: AI Semiconductor Surge Faces Supply Headwinds and Guidance Caution

Fabless chip and software maker Broadcom (NASDAQ:AVGO) met Wall Street’s revenue expectations in Q2 CY2026, with sales up 85.5% year on year to $29.59 billion. On the other hand, next quarter’s revenue guidance of $34.8 billion was less impressive, coming in 1.1% below analysts’ estimates. Its non-GAAP profit of $3.32 per share was 2.5% above analysts’ consensus estimates.

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StockStory’s Take

Broadcom’s second quarter results were met with a negative market reaction, as investors weighed robust revenue growth against concerns about the company’s forward trajectory. Management attributed the quarter’s strong performance to continued acceleration in AI semiconductor demand, particularly from hyperscale customers deploying custom accelerators and AI networking solutions. CEO Hock Tan highlighted that, “Q3 AI semiconductor revenue grew 221% year-on-year and up 54% sequentially,” driven by high-volume shipments to key customers such as Anthropic, Google, and OpenAI. The company’s rapid innovation cycle and the diversification of its AI chip portfolio played central roles in delivering operating leverage and margin expansion.

Looking ahead, Broadcom’s revenue outlook reflects both optimism around ongoing AI demand and caution regarding industry-wide constraints. Management emphasized the importance of securing supply for next-generation XPUs and networking products, while also acknowledging challenges tied to infrastructure bottlenecks, such as land, power, and data center readiness. CFO Amie O'Toole noted, “As XPUs become a larger proportion of our revenue mix, it impacts our margin,” and the company expects continued operating leverage to offset gross margin dilution. The trajectory of AI-related growth is expected to remain strong, but the pace will depend on Broadcom’s ability to navigate these external constraints and execute on its ambitious multi-year roadmap.

Key Insights from Management’s Remarks

Broadcom’s leadership credited the latest quarter’s results to accelerating AI semiconductor adoption, particularly among leading AI labs and hyperscalers, while noting the impact of product mix shifts and supply chain investments.

• AI custom accelerator momentum: The company’s AI semiconductor revenue was driven by rapid adoption of custom XPU solutions, including Ironwood TPU and Jalapeno for customers like Google, Anthropic, and OpenAI. Management highlighted that XPU shipments grew more than 3.5 times year-on-year and represented 73% of AI revenue.
• AI networking expansion: AI networking revenue, anchored by the Tomahawk 6 Ethernet switch and next-generation Tomahawk Ultra platform, increased more than 2.5 times year-on-year. These products are now broadly adopted by the majority of AI hyperscalers, supporting both scale-out and scale-up networking in large AI clusters.
• Infrastructure software growth: The infrastructure software segment posted 29% year-on-year growth, with continued strength in annual recurring revenue (ARR) and the rollout of VMware Private AI Cloud for secure, enterprise-grade AI deployments. Management called out new opportunities as enterprises seek to run AI workloads in private environments.
• Supply chain and capacity investments: Broadcom is ramping investments in substrate manufacturing capacity, particularly with a new Singapore facility, to address supply bottlenecks for future XPU generations. The company is also expanding capacity for optical components, such as EML and CW lasers, to meet surging demand from AI data centers.
• XPV financing platform launched: The company established the XPV financing platform in partnership with Apollo and Blackstone, enabling more than 20 gigawatts of compute infrastructure for OpenAI and Anthropic by 2028. This structure aims to bridge the funding gap for select customers and supports locked-in demand for Broadcom’s AI chips.

Drivers of Future Performance

Management expects future growth to be fueled by continued AI infrastructure build-out, but flagged supply chain limitations and data center readiness as key factors shaping execution.

• Persistent supply constraints: While Broadcom has secured long-term supply for AI semiconductors, management cautioned that the rollout of new capacity depends on resolving bottlenecks in substrates, memory, and manufacturing. CEO Hock Tan said, “We are going to start deploying our Singapore fab for substrates starting fiscal '27,” signaling ongoing efforts to alleviate these constraints.
• Data center infrastructure hurdles: The pace of AI-driven growth will hinge on the availability of land, power, and data center shells for Broadcom’s largest customers. Tan emphasized that these infrastructure factors “dictate specific timing of when this capacity gets deployed,” underscoring their influence on the company’s multi-year revenue outlook.
• Gross margin pressure from product mix: As XPUs and high-memory content products become a larger share of revenue, gross margins are expected to decrease. However, management believes operating leverage from rapid revenue growth will help sustain operating margins, even as gross margins moderate due to the changing mix.

Catalysts in Upcoming Quarters

Going forward, the StockStory team will monitor (1) the pace at which Broadcom can alleviate supply chain bottlenecks, particularly in substrate and memory capacity; (2) the rate of customer build-out for new data center infrastructure, including land and power availability; and (3) adoption of next-generation AI semiconductors and networking products. Progress on these fronts will be pivotal in sustaining Broadcom’s growth trajectory.

Broadcom currently trades at $343.60, down from $367.65 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free).

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