Broadcom AVGO reported strong growth in the second quarter of fiscal 2026, but gross margin continued to decline. Gross margin was 77.1%, down 230 basis points from the prior year. The decline reflects a shift in revenue mix, with the company’s faster-growing semiconductor business accounting for a larger share of overall sales.
Semiconductor revenues increased 79% year over year to a record $15 billion and accounted for 68% of total revenues in the quarter. The company indicated that the growing contribution from semiconductors diluted consolidated gross margin relative to periods when infrastructure software accounted for a larger portion of revenues. Despite the decline, Broadcom emphasized that semiconductor margins remain stable and that the pressure is largely mix-driven.
The company expects this trend to continue in the fiscal third quarter of 2026. Gross margin is projected to decline to approximately 74% as semiconductor revenues become an even larger percentage of total sales.
Demand across the semiconductor segment remains robust. AI semiconductor revenues reached a record $10.8 billion in the second quarter, up 143% year over year, with networking contributing nearly 40% of total AI revenues. Broadcom expects AI semiconductor revenues to increase to approximately $16 billion in the third quarter, while total semiconductor revenues are forecast to reach $20.5 billion, representing 124% year-over-year growth.
Broadcom expects total fiscal third-quarter of 2026 revenues of $29.4 billion, up 84% year over year. Infrastructure software revenues are projected to rise 31% to $8.9 billion, supported by strong adoption of VMware Cloud Foundation. Although gross margins are declining, operating profitability remains strong, with second-quarter operating margin expanding to 67.3% and projected to remain near 67% in the fiscal third quarter. The Zacks Consensus Estimate for revenues is currently pegged at $29.46 billion, suggesting 84.7% growth from the figure reported in the year-ago quarter.
AVGO Faces Tough Competition in the Semiconductor Space
Broadcom is facing stiff competition from Advanced Micro Devices AMD and NVIDIA NVDA in the semiconductor space.
Advanced Micro Devices is benefiting from strong demand for its EPYC processors and Instinct GPUs, which are driving growth in the Data Center business. In the first quarter of 2026, Advanced Micro Devices' Data Center revenues increased 57% year over year to a record $5.8 billion, supported by robust cloud and enterprise adoption. The rapid scaling of AI workloads, particularly inferencing and agentic AI applications, is boosting demand for EPYC processors. Major cloud providers are expanding their EPYC deployments to support general-purpose computing, data processing and AI infrastructure workloads. Advanced Micro Devices is witnessing accelerating adoption of Instinct GPUs as customers move from pilot projects to large-scale AI deployments. The continued growth of EPYC and Instinct products helped lift gross margin by 170 basis points year over year to 55% in the quarter.
NVIDIA is benefiting from strong demand for its AI computing and networking products as companies continue to invest heavily in data center infrastructure. The company's Blackwell platform is seeing widespread adoption across cloud providers, AI companies and enterprise customers, helping drive rapid growth in its Data Center business. In the first quarter of fiscal 2027, Data Center revenues rose 92% year over year and 21% sequentially to a record $75 billion. Growth was fueled by strong demand for Blackwell systems and networking products. Data Center computing revenues increased 77% year over year to $60 billion, while networking revenues nearly tripled to $15 billion. NVIDIA also maintained healthy profitability, reporting a non-GAAP gross margin of 75%. The company expects gross margin to remain around 75% in the second quarter of fiscal 2027.
AVGO’s Share Price Performance, Valuation & Estimates
Broadcom shares have increased 13.7% year to date, underperforming the broader Zacks Computer and Technology sector’s rise of 18.2%.
AVGO Stock Outperforms Sector
Image Source: Zacks Investment Research
The AVGO stock is trading at a premium, with a forward 12-month price/sales of 12.50X compared with the broader sector’s 6.67X. Broadcom has a Value Score of D.
AVGO Stock Has a Stretched Valuation
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for the third quarter of fiscal 2026 earnings is pegged at $3.22 per share, up 1.5% over the past 30 days, suggesting 90.5% growth from the figure reported in the year-ago quarter.
Broadcom Inc. Price and Consensus
Broadcom Inc. price-consensus-chart | Broadcom Inc. Quote
Broadcom currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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This article originally published on Zacks Investment Research (zacks.com).