Morgan Stanley Still Bullish on Broadcom, Raises Price Target Despite Market Jitters

Broadcom's stock (AVGO) experienced a sharp decline of 11%, falling to around $360 and wiping out over $200 billion in market value, despite a strong earnings report.

The technology company reported nearly $18 billion in Q4 sales, surpassing expectations. They also projected a robust $19.1 billion for Q1. Earnings per share also exceeded estimates by eight cents, coming in at $1.95.

That said, the reality is a bit more complicated. investors reacted negatively to management's warning that increasing demand for AI chips is expected to compress gross margins by 100 basis points, according to Reuters. The company indicated that custom accelerators offer lower profitability.

Despite this, Morgan Stanley is standing by Broadcom. Joseph Moore, a five-star analyst at the firm, reaffirmed an overweight rating and increased Broadcom’s price target from $443 to $462, which represents a 28% increase from the current price.

Moore believes the long-term outlook remains “very strong.” He views the recent selloff as an overreaction to short-term concerns rather than a fundamental flaw in Broadcom’s business.

Broadcom's Earnings vs. Market Reaction

Broadcom delivered strong earnings results, concluding a successful year. Both revenue and earnings exceeded estimates by a significant margin, the largest in the past four quarters. Here's a summary of Broadcom's performance over the last four quarters:

• FQ4 2025 (Oct. 2025):** EPS $1.95 (beat by $0.08), revenue $18.02 billion (beat by $555.89 million, +28.18% year-over-year)
• FQ3 2025 (July 2025):** EPS $1.69 (beat by $0.03), revenue $15.95 billion (beat by $129.31 million, +22.03% YoY)
• FQ2 2025 (April 2025):** EPS $1.58 (beat by $0.01), revenue $15.00 billion (beat by $28.43 million, +20.16% YoY)
• FQ1 2025 (Jan. 2025):** EPS $1.60 (beat by $0.09), revenue $14.92 billion (beat by $325.27 million, +24.71% YoY)

Management also projected Q1 sales of $19.1 billion, exceeding analysts' estimates of $18.31 billion. AI sales are projected to reach $8.2 billion, doubling last year's figures.

Investors, however, are primarily focused on the expected 100 basis point compression in gross margin due to lower-margin custom accelerator systems.

Other Analysts Weigh In

Here’s what other major banks are saying about Broadcom's stock:

• Bank of America:** $500 price target, buy (39% upside). Increased from $460, citing growing AI chip demand.
• Goldman Sachs:** $450 price target, buy (25% upside). Increased from $435, stating Broadcom remains a long-term AI infrastructure leader.
• UBS:** $472 price target, buy (31% upside). Increased from $415, based on significant AI and networking growth.
• Bernstein:** $475 price target, outperform (32% upside). Increased from $400, citing Broadcom’s impressive earnings potential.

Moore expressed surprise at the stock market's negative reaction. He stated that the results were “very good… showing near-term upside for the first time in a while.” He also noted that Broadcom increased its AI customer base from three to five while consistently raising expectations each quarter.

AI-related sales exceeded forecasts, with Q1 AI guidance 20% higher than his model. The company also increased full-year sales and EPS forecasts more significantly than in previous quarters.

Moore believes this quarter was not a disappointment but rather a “short-term inflection.” He suggests the market overlooked the bigger picture, focusing solely on margins.

The Anthropic Factor

Broadcom's AI growth story becomes more intricate when considering the Anthropic factor.

Moore believes Broadcom's outlook for the second half of 2026 remains “very strong” but acknowledges modeling challenges. Broadcom has secured $21 billion in orders from Anthropic, including a $10 billion commitment last quarter and an additional $11 billion announced during the call.

These orders are expected to ship in the latter half of 2026, meaning one customer accounts for a substantial 40% of Moore's full-year AI estimate.

The main challenge is that these systems operate on Google's TPU architecture, which means that Google will receive some of the margins. Also, because this is a full rack-scale system sale, gross margins are likely to be significantly lower.

Despite this, Moore remains optimistic about Broadcom's “very strong growth potential” in custom chipmaking and networking. He also believes the numbers remain conservative, with Broadcom's management being “among the most credible” in the industry.

Margin Trade-Offs

Broadcom's management acknowledged the margin trade-offs associated with the AI surge.

CFO Kirsten Spears advised investors to anticipate some compression, projecting a 100 basis point sequential decrease in Q1 2026, reflecting a higher proportion of AI revenue.

She added that as the company ships more systems, it will pass through more cost in the rack, resulting in lower gross margins.

That said, the reality is a bit more complicated. CEO Hock Tan emphasized the need to consider the broader perspective. While acknowledging that “AI revenue has a lower gross margin than the rest of our business,” he stated that the company will still “get the operating leverage” it needs as volumes increase.

In essence, gross margins may be affected, but gross profit dollars and operating income are still expected to increase as AI revenue grows. The impressive numbers support this outlook.