1. Market & Expectations
Broadcom (AVGO) heads into its December 11 after-close print sitting near all-time highs. The stock just closed around $413, up roughly 78% year-to-date and about 130% over the past year, and now trades only a bit above its prior 52-week high near $407, more than 200% above its 52-week low around $138. Short-term realized volatility is elevated, with 30–90 day annualized vol in the mid-40s–high-40s range based on recent trading in the underlying.
Street expectations are very full. Consensus for Broadcom’s fiscal Q4 2025 (October quarter) clusters around revenue of roughly $17.4–17.5B (≈24% YoY) and non-GAAP EPS around $1.87, with the usual focus on another big step-up in AI-related chip revenue and continued strength in infrastructure software (VMware). Many previews also frame Q4 AI semi revenue around ~$6.2B, with FY26 AI revenue targets well north of $20B.
Analyst tone is aggressively bullish, with plenty of fresh target hikes clustered in the $400s. Historically, AVGO’s earnings moves have tended to be large but not consistently explosive: the market often prices something like a mid-single-digit move, and realized earnings-day reactions have been smaller than implied about half the time. Recent quarters have skewed modestly positive: a clean beat-and-raise can still turn into a low-single-digit reaction if the bar is already high.
Big picture: AVGO is into this print with very strong price momentum, extremely rich expectations, and a crowd of bullish sell-side and momentum buyers already in the name.
2. Business & Balance Sheet
Broadcom is now a hybrid of two powerful engines:
- Semiconductor Solutions – custom AI accelerators/ASICs for hyperscalers, Ethernet and optical networking, broadband and wireless RF, storage controllers, industrial, and other specialty silicon.
- Infrastructure Software – largely VMware plus CA and Symantec assets, providing data-center, virtualization, and security software with a focus on large enterprise/private cloud workloads.
Fundamentals are very strong. TTM revenue is near $60B, with gross margins around 63%, operating margins near 39%, and net margins north of 30%—a top-tier profitability profile even among mega-cap semis. Recent quarters have showcased record AI chip revenue and accelerating growth in that segment; management has highlighted AI accelerators, Ethernet switches, and VMware as the three main growth pillars.
VMware’s integration has dramatically scaled the software business; FY24 software revenue jumped from about $7.6B to ~$21.5B, largely on VMware, with very high incremental margins.
The balance sheet is solid but not debt-free (levered, but highly cash-generative). AI hardware and software growth plus high margins support strong free cash flow, which Broadcom has historically returned via a growing dividend (~0.6% yield) and active buybacks.
Key event-related dynamics this quarter:
- AI upside vs. capex digestion fears: The near-term AI story is still strong, but “capex digestion in 2026–27” and hyperscaler concentration risk are now mainstream talking points, which raises the bar for what counts as “good enough” guidance.
- VMware integration and customer noise: Financially, VMware is a big profit driver. But Broadcom’s pricing/bundling strategy has sparked customer pushback and litigation risk (e.g., Fidelity’s lawsuit over VMware access terms). That’s a medium-term narrative risk even if near-term numbers stay strong.
- Margins: Some previews flag a modest sequential gross-margin headwind from mix, even as operating margin remains high.
Overall, fundamentals are exceptional, but the narrative is already “best-in-class AI + software compounder,” leaving little room for merely “good” results.
3. Options, Positioning & Sentiment
Using the Dec 10 snapshot at a spot price of $412.84, the primary event expiry is Friday 2025-12-12, the first expiration after the confirmed Dec 11 after-close earnings.
- At the 412.5 strike for the 2025-12-12 expiry (near-ATM), the call mid is about $14.25 and the put mid about $13.75, implying a 2-day straddle around $28.
- Dividing the $28 straddle by the $412.84 spot implies an options-market move of ≈6.8% (one-day earnings move embedded in a 2-day window).
- Short-dated implied vol around the event is very high (roughly 110–115% annualized), in line with a large single-event move and above recent realized vol.
Compared with history, the current implied move (~6.8%) is slightly above a “typical” predicted move (~6% range). That leans modestly toward “event vol is not cheap,” but the gap isn’t extreme.
Open interest around the event expiry shows a crowded but mostly bullish positioning pattern:
- 400 and 420 strikes carry the largest combined open interest, with 400s fairly balanced and 420s heavily call-dominated.
- On the downside, sizeable put walls are stacked in the 360–380 zone, plus a notable line around 320, suggesting hedging or tail-risk structures down there.
- Farther up, 500 calls have large open interest with minimal puts, signaling speculative upside appetite well beyond the near-term implied move.
Ownership and sentiment are also stretched:
- Short interest is low (~1–1.5% of float), showing a crowded long with little outright bearish positioning.
- Analyst coverage is deep and strongly positive, with a dense cluster of “buy/outperform” ratings and raised targets into the print.
- Pre-earnings media flow is almost uniformly upbeat, highlighting Broadcom as a top AI winner heading into the number.
Netting this out: bullish, crowded positioning with moderately expensive event vol — not a fear-driven setup.
4. Guidance, Direction & Confidence
Scenario Map
Base case (highest probability, ~45%) – Strong print, guidance good but “priced in,” stock trades down modestly
- Quarter: Revenue roughly in line to slightly above consensus (≈$17.5–17.7B), with AI semi revenue landing close to the ~$6.2B chatter and infrastructure software continuing to show high contribution. EPS modestly beats or matches consensus around $1.87.
- Guidance: FY26 commentary stays constructive—double-digit growth, strong AI pipeline, VMware synergy—but management acknowledges mix headwinds and elevated AI-cycle uncertainty. Guidance is “strong,” but not meaningfully above already-bullish expectations.
- Market reaction: With the stock at extreme valuation multiples, investors use the event to take profits and rebalance AI exposure after a big run. The stock gaps down roughly 4–8%, landing somewhere in the $380–$395 area, a move in the neighborhood of the implied move once the dust settles.
- Narrative: “Results were strong, AI growth remains impressive, VMware is a cash machine—but at this valuation, that’s not enough to power another leg higher.”
Downside case (~25%) – AI or VMware disappointment, or a cautious 2026 tone, drives a sharper derating
- Quarter: Revenue lands below consensus (say $17.0–17.3B), with AI revenue a bit light versus hype, and/or VMware growth slowing more than expected amid customer noise. EPS underwhelms, and margin compression looks worse than feared.
- Guidance: FY26 outlook signals slower AI capex growth beyond 2025, or more visible friction in VMware’s customer base, forcing investors to rethink the “open-ended AI + software” story.
- Market reaction: At this starting valuation, any hint of decelerating AI growth or software stress could trigger an 8–15% gap down.
Upside case (~30%) – AI and software both beat, guidance upgrades push the melt-up further
- Quarter: Revenue clears the high bar (≥$18B), with AI revenue comfortably ahead of chatter and VMware posting better-than-feared growth. EPS beats, and margins hold up better than expected.
- Guidance: Management raises FY26 targets or talks confidently about sustaining very high AI revenue growth into 2026–27, easing digestion fears.
- Market reaction: Stock gaps up 5–12% into the low- to mid-$440s.
Directional Call & Rationale
I’m taking a base-case call of a down earnings gap, with an expected move of about −6% and medium conviction.
-
Why down?
-
Valuation & crowding: AVGO is priced for perfection. With the stock already near record highs, even a clean beat and healthy guide can read as “good but fully priced.”
-
Positioning: Options positioning looks call-heavy and ownership looks crowded long. That’s a setup where “not amazing” tends to trade poorly.
-
Narrative risk: AI demand and VMware synergies look strong, but capex digestion and VMware customer backlash are now common concerns. Even subtle signs of these risks creeping into FY26 framing can shift sentiment.
-
Why not higher conviction?
-
Broadcom still looks like one of the cleanest AI + software stories, and management has a strong track record of delivering or beating guidance.
-
The upside scenario is meaningful — it’s just competing against a very high starting bar.
Approximate Factor Weights (sum ≈1.0)
- Revisions & estimate setup: 0.20
- Options & positioning: 0.25
- Valuation: 0.25
- Price action/technicals: 0.20
- Macro/sector: 0.05
- Idiosyncratic/special: 0.05
Net call:
- Predicted gap direction: Down
- Expected absolute gap size: ≈6% (within a −4% to −8% band, slightly smaller than the ±6.8% implied)
- Guidance tone: Strong, but not meaningfully above already-lofty expectations
- Direction confidence: Medium (low-60% range)