Broadcom is reaffirmed at Buy after fiscal third-quarter results published on 2 September. The investment score rises from 74.5 to 76.5.

Q: The quarter set records on every line. Why did the shares fall?

A: Because of one number. Revenue of $29.59bn rose 86% against a $29.43bn consensus, non-GAAP earnings of $3.32 beat $3.24 and grew 96%, operating margin reached a record 67.9%, and free cash flow of $13.67bn was 46% of revenue. That cash was generated while working capital absorbed $3.3bn, so the quality of the print was not in doubt. Fourth-quarter revenue was then guided to approximately $34.8bn against a $35.0bn consensus. A 0.6% shortfall took roughly 6% off the stock within minutes.

Q: What changed during the conference call?

A: Management put multi-year figures on the record for the first time. AI semiconductor revenue is guided to approximately $115bn in fiscal 2027 and $230bn in fiscal 2028, with supply described as secured for both. Chief executive Hock Tan then said the company is on target to exceed $30 in earnings per share in fiscal 2028. None of that appeared in the press release. The shares recovered most of the fall.

Q: Does that make Broadcom cheap?

A: At Tuesday’s close of $367.24 the stock trades at 12.2 times that 2028 figure, and under 16 times even after a 20% haircut. The caveat is that building the guided AI line into a full profit-and-loss account produces roughly $168bn of fiscal 2027 revenue, slightly below where consensus already sat. That helps explain why several price targets were trimmed this week even as the AI outlook rose.

Q: What went the wrong way?

A: Gross margin. It fell to 75.0% from 77.1% in the second quarter and 78.4% a year ago, and is guided to about 73% next quarter as memory-heavy custom accelerators take a larger share of the mix. The August report had set an upgrade test requiring the AI number above $100bn with margin intact. Half of that test was met, which is why the rating is held rather than raised.

Q: What is the outstanding concern?

A: Broadcom is helping finance two of the customers it expects to be its largest by 2028. Asked twice on the call to size the maximum backstop exposure across that platform, the chief financial officer declined both times. The balance sheet itself improved sharply, with net debt falling from $45.3bn to $35.4bn in a single quarter, but the contingent obligation behind the 2028 revenue line remains unquantified.

Entry levels, the revised cut-loss and the full scenario analysis appear in the complete Broadcom (AVGO) report on the Reports page.