The AI sell-off extended on Friday and affected stock markets around the world. Oil prices remained volatile amid the U.S.-Iran tensions. Chip stocks, in particular, took the largest hit after a poor week. There is skepticism that AI chip prices are too high and that demand for computer memory and processors would be unsustainable if AI ends up making less profit than expected. AI spending has been in question, with companies burning through capex faster than anticipated and potential returns uncertain given the scale of investments of hyperscalers.
The sector-wide AI sell-off has taken down Broadcom Inc. (NASDAQ:AVGO) as well, with the stock declining over 7% in the last week. However, AVGO is not a speculative bet; it is a company generating $10.3 billion in FCF per quarter, with $30 billion in quarterly AI bookings as of Q2 FY2026.
Investors who have an eye on the future may look into this aspect of Broadcom: AI semiconductor revenue is growing in triple digits. During Q2 FY2026, AI semiconductor revenue soared 143% year-over-year, representing 49% of the total revenue. Whereas Broadcom's high-margin software business, which operates at 93% gross margin and has been the backbone of the company's blended profitability, represents 32% of the total revenue and grew at just 9% year-over-year.
With each passing quarter, Broadcom's software continues to offer a high-margin earnings foundation, even as its AI semiconductor business grows at a robust pace. The growth buildup around its AI semiconductor segment is remarkable. But it is creating a product mix that is statistically shrinking gross margins. Consolidated gross margins dropped to 77.1% in Q2, down 230 basis points from a year ago, and are expected to plunge further to 74% in Q3. The management explicitly identified this as a mix-shift effect, not structural margin erosion, and pointed to operating margin leverage as the offset. Interestingly, the company's operating margins have remained steady at a record 67.3%.
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Management's response to a thesis that Broadcom is transitioning into a pure-play AI semiconductor firm was an emphatic no. CEO Tan Hock told Citi analysts during the Q2 earnings call that AI is not disrupting software renewals; on the contrary, the high volume of CPU cores deployed alongside GPUs is accelerating VMware's business growth. Infrastructure software revenue is expected to be around $8.9 billion for Q3, up 31% from a year ago. Tan pointed out that the company does not expect any long-term impact on its software business amid its deep integration at the hypervisor layer. However, the numbers tell you otherwise: the two segments are growing at a disproportionate level, as the software business contribution continues to grow at a lower pace.
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