Broadcom (NASDAQ:AVGO) stock rose Tuesday, as investors assessed the chipmaker’s ability to turn a $73 billion AI orders book into sustainable revenue growth.
Stocks recovered from a December drop, and the focus is now on supply gains and visibility of backlogs rather than short-term margin concerns.
The management also expressed confidence in the ability of cash flow to sustain itself, even if AI chip revenue surpasses traditional business lines.
Broadcom Stock: Investors are buying the growth story
Broadcom revealed a backlog of $73 billion in AI semiconductor orders that will be shipped over the next 18-months.
This number is far above the expectations of Wall Street and discredits the narrative that there’s a cooling in demand.
AI revenues for the company reached $6.55 billion during its fourth quarter, an increase of 74% year over year.
This would be a 150% increase, which has been cited by analysts from around the world. Broadcom is a key player in AI infrastructure.
An analyst at Bank of America highlighted a crucial point: Broadcom’s growing customer base of custom accelerators, also known as XPUs.
In Q4, new hyperscalers like Anthropic increased demand by $1 billion, indicating that backlogs are not concentrated with a single customer.
It matters. Worried traders were concerned when AI demand appeared fragile by mid-December. What would happen if a giant cloud provider cut orders?
Backlog depth is the answer to that question. Broadcom’s demand will be real and diversified through 2026, 2027.
Goldman Sachs observed that both XPUs and networks continue to grow, and also pointed out Broadcom’s dominant position in AI datacenter fabrics.
This is the least exciting, but crucial part of infrastructure.
Broadcom networking chips and customized silicon, while everyone is focused on Nvidia GPUs, are just as important and offer better economics to the company when you can control volume.
The importance of dividend boosts and margins
Broadcom has announced an increase of 10% in its quarterly dividend, which will be payable on December 31, from 59 to 65 cents.
It is the 15th annual increase in dividends since 2011. This record matters for income-focused investors.
Broadcom has a payout ratio of approximately 50% for dividend-growth funds, which leaves room for growth even when capex increases.
The tension that traders face is this: AI chip sales are booming but they have lower margins than Broadcom’s networking and software business.
The management expected Q1 gross margins in 2026 to drop by about 100 basis point sequentially. This would be a significant headwind, both in terms of percentage and dollar margins.
Some investors forgot to inquire about the revenue base when they heard of “margin compressing”.
Backlog is the answer. AI revenues will double and the dollar margins in absolute terms should increase significantly, compensating for percentage squeeze.
The post Why Broadcom stocks are rallying Tuesday can be updated as new information becomes available
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