Broadcom Drops After Earnings, as Its AI Chips Are Doubted. What's Next?
Broadcom Earnings Preview: The Next Big AI Infrastructure Test
$Broadcom (AVGO.US)$ , the global leader in AI ASIC chips, will release its FY2026 Q2 earnings report after market close this Wednesday. Market focus is primarily on the potential loss of market share in $Alphabet-C (GOOG.US)$ TPU orders and the ramp-up pace of ASIC orders from other customers, while investors are also anticipating a further upward revision of AI order backlog data.
FY26Q2 Core Financial Indicators
– Revenue: Market consensus estimate is $22.12 billion, up 47% YoY and 15% QoQ, compared to prior guidance of $22.0 billion.
– Non-GAAP Gross Margin: Market consensus estimate is 76.8%, down 2.6 percentage points YoY and 0.2 percentage points QoQ, marking the fourth consecutive quarter of QoQ decline.
– Non-GAAP Operating Margin: Market consensus estimate is 66.5%, up 1.2 percentage points YoY and 0.1 percentage points QoQ, marking the fourth consecutive quarter of QoQ improvement.
– Non-GAAP Net Income: Market consensus estimate is $11.77 billion, up 75% YoY and 16% QoQ.
Three Things to Watch
Custom AI chips need to answer the TPU and Trainium debate
The most important question is not whether $Broadcom (AVGO.US)$ can challenge $NVIDIA (NVDA.US)$ . It is whether Broadcom can defend its custom AI chip growth story against two specific concerns.
First, investors want clarity on $Alphabet-C (GOOG.US)$ TPU demand after reports that MediaTek is gaining a larger role in next-generation TPU programs. TrendForce reported that both Broadcom and MediaTek are preparing capacity for Google's TPU ramp, while Counterpoint expects MediaTek to build a stronger AI ASIC server position by 2028, driven by Google's TPU roadmap.
Second, investors will watch whether $Amazon (AMZN.US)$ 's Trainium and other in-house ASIC efforts shift more value toward alternative partners such as $Marvell Technology (MRVL.US)$ . Broadcom does not need to own every custom chip program. It needs to prove its AI ASIC pipeline is still broadening, customer concentration risk is manageable, and Q2's expected $10.7 billion of AI semiconductor revenue is not a near-term peak.
AI networking needs to defend the Ethernet story
Broadcom's networking story now has a clearer benchmark: $NVIDIA (NVDA.US)$ . In Q1 FY2027, Nvidia Data Center networking revenue reached a record $14.8 billion, up 199% year over year and 35% sequentially, while management said Spectrum-X is now larger than all Ethernet network peers combined.
That makes Broadcom's earnings call important for one question: can open Ethernet still gain share as Nvidia pushes its own vertically integrated networking stack? Broadcom's answer is Tomahawk 6, 102.4 Tbps Ethernet switching, 400G-per-lane optical DSPs and open scale-up, scale-out and scale-across connectivity. The call needs to show that Broadcom is still a core beneficiary of AI cluster networking, not just a custom ASIC story.
VMware needs to prove stability
Software is the stabilizer. In Q1, infrastructure software revenue was $6.8 billion, up only 1% year over year, while semiconductor solutions revenue grew 52%. That split makes Q2 software commentary important.
Investors want to see whether VMware can support high margins and cash flow without creating churn concerns. A strong AI semiconductor print plus stable VMware execution would make the Broadcom story cleaner. Weak software commentary would make the stock more dependent on AI hardware upside.
Options Strategy
Broadcom's options complex carries a defensive tilt into earnings, with a put/call ratio of 1.12 across 1.99M contracts of open interest and implied volatility marked at 63.68% against 39.99% realized, sitting in the 94th percentile with an IV Rank of 83 as traders bid up premium aggressively in anticipation of an outsized post-print move.
Broadcom's gamma exposure for the June 5 weekly expiry shows the stock at $459.97 sitting deep in positive gamma territory well above the $380.09 flip, with dealer positioning anchored by a Put Wall at $400 and a towering Call Wall at $420, a setup that should keep realized volatility suppressed and pin the tape barring a violent move back toward the flip.
Summary
Broadcom is one of the cleanest AI infrastructure stories outside Nvidia, but this is no longer a low-expectation setup. The company needs to prove that custom AI chips can withstand the TPU and Trainium debate, Ethernet networking can defend its role against Nvidia’s stack and VMware can remain a margin anchor.
If all three hold up, the rally has a stronger fundamental base. If any one breaks, the stock may struggle to defend its record-high setup.
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