Broadcom Downgraded to Neutral as Price Target Cut to $398
Key Facts
Rothschild Redburn downgraded Broadcom to "Neutral" from "Buy" on Friday, Nov. 13, and cut its price target to $398 from $595, Investing.com reported. The firm tied its decision to concerns about financing for AI infrastructure and the sustainability of Broadcom's earnings. The reported 6% drop in the stock during that day's session could not be verified from a reliable open source. The stock closed at $364.36 on Nov. 12, according to EL7 data. The downgrade puts expected cash flows from the AI boom under investor scrutiny, as customers' ability to finance their expansion becomes increasingly important.
Rothschild Redburn said Broadcom's guidance implies the stock is trading at 11 times earnings per share for fiscal 2028. It added, however, that the quality and sustainability of earnings are under scrutiny amid reliance on continued demand for computing infrastructure. Part of that scrutiny centers on whether leading AI companies can access credit markets to fund their needs. The firm said investment-grade credit ratings for these companies would be helpful and could reduce Broadcom's need to provide support guarantees. Under its argument, the stock's valuation is therefore tied to customer credit risk as well as revenue growth expectations.
The debate comes as Broadcom's AI revenue outlook rests on supporting up to 15 gigawatts of computing capacity for Anthropic and OpenAI. The report said this capacity underpins the company's guidance for $230 billion in AI revenue in fiscal 2028. In its disclosure, Broadcom put the maximum potential liability under its residual value guarantee, when AI racks are deployed, at about $43 billion on an undiscounted basis. That figure is a potential cap on liability tied to the guarantee, not the company's total general exposure to financing arrangements. The comparison between the revenue outlook and the guarantee shows that the expected commercial expansion comes with potential obligations tied to asset financing.
Broadcom's disclosure explained that its potential liability in the event of customer default is calculated as the difference between 72.5% of the remaining amounts due and the value of the AI racks recovered when sold. On Oct. 26, Broadcom and its financial partners announced a $63 billion deal to enable deployment of AI computing capacity for Anthropic, with deliveries expected to begin in 2027. The company said it provides the special-purpose entity with residual value support equal to the first-lien financing tranche. These arrangements link computing capacity deployment to the availability of financing, while the impact on Broadcom remains tied to the guarantee terms and the value of assets upon recovery. The stock's move on Oct. 27 reflected an earlier positive reaction to the deal, rising 4% after its announcement.
Financing concerns coincide with strong growth in Broadcom's quarterly results. The company said revenue was $29.6 billion in the third quarter of fiscal 2026, up 86% from the same period a year earlier. AI semiconductor revenue was $16.7 billion, up 221% year over year and 54% quarter over quarter. The company expected that revenue to rise to $21.7 billion in the fourth quarter of fiscal 2026. It also disclosed that cash and cash equivalents rose to $24.0 billion at the end of the third quarter, compared with $19.6 billion at the end of the previous quarter.
Rothschild Redburn also said competitive pressure could reduce gross margins in Broadcom's inference business. It noted that customer-owned Google tools are an issue requiring reassurance for the market, given the risk that this approach could become widespread. Broadcom, for its part, disclosed the risk that some AI customers may be unable to pay for the required infrastructure because of limited resources or capital. The company said financing arrangements and guarantees could increase its exposure to counterparty credit risk and asset impairment, potentially weighing on its financial results. These risks put customer financing, business margins and asset values among the factors markets are watching in assessing the company's outlook.
Markets are looking ahead to Dec. 9, 2026, when Broadcom will report fourth-quarter and fiscal 2026 results and its outlook after the close of U.S. trading. The company scheduled a results and outlook conference call for 2:00 p.m. Pacific time that day. The upcoming disclosures will update the company's guidance and what it reports on demand, financing and support obligations. Broadcom said on Sept. 2 that it expected fourth-quarter fiscal revenue of about $34.8 billion, up 93% from the same period a year earlier. The December results follow the downgrade, with investors focused on execution against guidance and customer financing risks.