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Call it the "Oracle Effect." Broadcom (AVGO) reported strong fiscal fourth-quarter earnings, but the stock was falling 5% in premarket trading yesterday as investors were disappointed by the AI chipmaker's $73 billion backlog and the margin pressure it was bringing.

In the wake of Oracle's (ORCL) worryingly rising debt levels amid an AI buildout with no certainty of a payoff, the market is quickly demanding companies offer up proof of meteoric growth to justify the sky-high premiums being assigned to their stocks. It may become a common occurrence that any stock not measuring up to the new, higher standards will get knocked back. Broadcom may just be the first AI stock to face the new reality. It definitely won't be the last.

A Stellar Quarter Marred by Margin Pressure

Broadcom reported a record $18.02 billion in revenue, up 28% year-over-year, ahead of Wall Street's expectations, generating adjusted earnings of $1.95 per share, well ahead of analyst estimates of $1.88. CEO Hock Tan also said the momentum will continue into fiscal 2026 with Q1 revenue surging to $19.1 billion, also ahead of forecasts.

Yet, despite AVGO receiving an $11 billion order in Q4 from privately-held Anthropic, and Tan saying AI semiconductor sales would double to $8.2 billion in Q1 versus last year, he failed to offer any full-year guidance for AI revenue, saying it was "a moving target."

Tan said, "It’s hard for me to pinpoint what ’26 is going to look like precisely, so I’d rather not give you guys any guidance.”

He also noted that margins were narrowing due to greater AI chip sales, which unsettled investors looking for more certainty as doubts mount about the sustainability of the AI boom. CFO Kirsten Spears said Q1 gross margins would come in about 100 basis points lower sequentially as lower-margin system sales become a larger portion of revenue, particularly in the back half of the year.

Analysts were more forgiving. Morningstar, for example, wasn't worried about the margin dilution as "these chips are operating-margin-accretive."

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Reasons for Hope

While the markets are on edge about any opaqueness, there is actually a lot for investors to like. AVGO's AI chip business is accelerating and it should ramp up even higher of the next two years. It should benefit immensely from Google's TPU chips, which rely upon Broadcom designs, that continue to bring in new customers, including Anthropic and Meta Platforms (META).

It was recently reported that Meta was in talks to spend billions of dollars on the chips for use in its data centers. It is actually a bit of a blow to Nvidia (NVDA) if Meta begins moving away from it as the sole supplier. Broadcom is quickly becoming the go-to alternative for customers looking to diversify away from the dependence on Nvidia.

Bottom Line

Investors are right to demand more from their companies in justifying the premiums the markets are assigning to their stocks. We're likely entering a period where AI companies will be re-rated lower if they fail to live up to expectations.

Yet the risk is the baby is thrown out with the bathwater. Broadcom could just be the victim of being the first up after Oracle shook investor faith in forever-growth. Investors should look at any dip as a buying opportunity.

While AVGO trades at 30x sales and forward earnings estimates, Wall Street still forecasts 33% compound annual earnings growth for the next five years, meaning it offers a discount even before the premarket selloff is priced in.

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