Broadcom’s Stock Drops But Morgan Stanley Sees $462 Target on AI Demand & Margin Risks

TheStreet’s headline—that Morgan Stanley “drops eye-popping Broadcom price target after event”—is factually false. Instead, Joseph Moore at Morgan Stanley raised the target from $443 to $462, maintaining the Overweight rating. The mischaracterization appears to stem from confusion over the stock’s sharp decline following Broadcom’s earnings event. [1][2]

Broadcom delivered a robust Q4 FY2025: revenue of ~$18.02B (ahead of consensus ~$17.49B) and EPS of $1.95 (vs. estimated $1.87) [1][3]. These strong results were coupled with bullish Q1 guidance—$19.1B revenue and AI revenue expected to double YoY to ~$8.2B. [1][3]

However, management cautioned that as AI systems (i.e. custom chips and full rack deployments) become a larger portion of revenue, gross margins will compress—estimating about a 100 basis point margin drop sequentially. AI systems carry lower per-unit profitability than other semiconductor/networking segments. [1][3]

The market reacted badly: Broadcom shares dropped ~11% in one day, erasing over $200B in enterprise value. Despite strong results and favorable guidance, investors seemed fixated on near-term margin pressures rather than the long-term scale opportunity. [1][3]

Morgan Stanley’s stance reflects that long-term setup remains “very strong.” It cited expansion from three to five AI customers, orders backlog, and margins in non-AI segments still healthy enough to support operating leverage. The firm views the selloff as overreaction to “near-term noise.” [1][3]

Strategic implications: Broadcom is navigating a classic growth vs. margin trade-off. As AI systems revenue rises, the company must balance gross-margin dilution with scale, cost efficiency (especially in racks, optics, networking), and diversification of customer concentration. Investors will be watching closely for disclosures around system/component margins, cost structure of shipments, and how AI hardware deals are structured. Open questions include how durable its margin guidance is under competitive and supply chain pressures, and how well Broadcom can defend its position versus Nvidia and other ASIC suppliers in the AI infrastructure stack.