Broadcom’s AI Mix Shift: How AVGO’s Booming AI Chip Business Changes the Investment Thesis

Ali Hassan

Mon, July 20, 2026 astatine 12:11 PM CDT 5 min read

The AI sell-off extended connected Friday and affected banal markets astir the world. Oil prices remained volatile amid the U.S.-Iran tensions. Chip stocks, successful particular, took the largest deed aft a mediocre week. There is skepticism that AI spot prices are excessively precocious and that request for machine representation and processors would beryllium unsustainable if AI ends up making little nett than expected. AI spending has been successful question, with companies burning done capex faster than anticipated and imaginable returns uncertain fixed the standard of investments of hyperscalers.

The sector-wide AI sell-off has taken down Broadcom Inc. (NASDAQ:AVGO) arsenic well, with the banal declining implicit 7% successful the past week. However, AVGO is not a speculative bet; it is simply a institution generating $10.3 cardinal successful FCF per quarter, with $30 cardinal successful quarterly AI bookings arsenic of Q2 FY2026.

Investors who person an oculus connected the aboriginal whitethorn look into this facet of Broadcom: AI semiconductor gross is increasing successful triple digits. During Q2 FY2026, AI semiconductor gross soared 143% year-over-year, representing 49% of the full revenue. Whereas Broadcom's high-margin bundle business, which operates astatine 93% gross borderline and has been the backbone of the company's blended profitability, represents 32% of the full gross and grew astatine conscionable 9% year-over-year.

Why Broadcom's Gross Margins Are connected a Downward Trend

With each passing quarter, Broadcom's bundle continues to connection a high-margin net foundation, adjacent arsenic its AI semiconductor concern grows astatine a robust pace. The maturation buildup astir its AI semiconductor conception is remarkable. But it is creating a merchandise premix that is statistically shrinking gross margins. Consolidated gross margins dropped to 77.1% successful Q2, down 230 ground points from a twelvemonth ago, and are expected to plunge further to 74% successful Q3. The absorption explicitly identified this arsenic a mix-shift effect, not structural borderline erosion, and pointed to operating borderline leverage arsenic the offset. Interestingly, the company's operating margins person remained dependable astatine a grounds 67.3%.