Broadcaom stock is plunging in after-hours trading, after the company reported Q2 results which delivered a disappointing forecast for AI chip revenue, signaling that the company is either progressing more slowly than anticipated in the burgeoning industry, or that unlike its peers, is actually truthful in predicting the potential of the AI bubble.

The historicals were ok: in the fiscal second quarter, which ended May 3, sales rose 48% to $22.2 billion, just barely beating the $22.1 estimate. AI semiconductor revenue was $10.8 billion, also just barely above estimates of $10.7 billion. That category includes custom-built accelerators - the chips used to develop and run AI models - as well as networking semiconductors. Adjusted EPS climbed to $2.44 a share, also modestly beat the median estimate of $2.39.

But the forecast was a problem: AI semiconductor revenue will be $16 billion in the fiscal third quarter, missing analyst estimates of $17.2 billion. Total revenue will be about $29.4 billion, which while higher than the $28.6 billion median estimate was below some buyside bogeys which ranged billions of dollars higher. EBITDA guidance of 68.0%, also missed the street at 69.1%.

The forecast miss is concerning: Broadcom has signed and expanded long-term deals with companies like Google, Anthropic and Meta but questions remain as to how much revenue will be recognized in each quarter, as opposed to being accounted for in a multiyear backlog. 

Investors were also disappointed after the company kept its full year AI target at 10GW in 2027 and $100BN in chip sales for the full year, instead of boosting guidance as it had in prior quarters. The pressure was also margin related as GOOGL TPU growth generating lower margins than networking and software. 

CEO Hock Tan has tied the company’s fortunes to AI gear, betting on a rapid expansion of data centers and other infrastructure. While Nvidia remains the dominant maker of AI accelerators, Broadcom has positioned itself as a key alternative. 

In hopes of boosting its operational leverage, Broadcom has been taking a bigger role helping finance the purchase of chips. As Bloomberg reported over the weekend, Apollo and Blackstone are working on a roughly $36 billion debt financing deal to help Anthropic pay for its Google chips that Broadcom helped develop. Broadcom is backstopping payments on the largest portions of the transaction, Bloomberg reported. So we have yet another circular deal: Broadcom is funding the SPV that will allow Anthropic to pay Google for Broadcom chips. You can see why the entire AI industry is now so careful about even the smallest drawdown: if even the smallest cracks appear, questions will once again start swirling about risk and ROI, and now that there are over $600BN in private credit SPV backstopping future growth, the entire house of cards could come crashing down.

Against that backdrop, the latest report failed to satisfy investors, with the stock crashing over 12% in late trading, erasing all the recent "gamma squeeze" gains orchestrated by market makers to set the stage for the coming mega IPOs. It was up 38% this year through the close; those gains have been cut in half after the results. 

While Broadcom has made progress in pivoting to artificial intelligence customers, it finds itself against increasingly cutthroat competition and higher expectations. Broadcom added roughly $270 billion in market value over the last five trading sessions before the earnings report, fueled by AI optimism. All of that has been wiped out.