150 billion dollars in revenue becomes a “watershed moment” for the AI business! Damo maintains Broadcom (AVGO.US) “gain” rating, warning that success or failure all depends on poor expectations

The Zhitong Finance App notes that Broadcom (AVGO.US) will announce financial results for the third quarter of the 2026 fiscal year after the US stock market on September 2 (early morning of September 3, Beijing time). Its performance data will almost certainly be impressive. Morgan Stanley has made it clear that the real suspense is whether just being “dazzling” is enough.

This was the situation before entering the third quarter. The key is not “whether Broadcom can deliver good results”, but rather whether it can cross the high threshold privately set by some investors — raising AI revenue expectations for fiscal year 2027 to over $150 billion. By comparison, the figure predicted by Morgan Stanley is $120 billion.

The risk of short-term fluctuations lies precisely in the gap between these two numbers. Keep in mind that the experience of the second quarter was a good reminder: when market expectations are too high, even if the performance is very strong, it may not satisfy the market.

Morgan Stanley maintains a “plus” rating on Broadcom. But the title of this research report is very noteworthy: “The main risk before the earnings report is released is market expectations, not fundamentals.”

According to the research report, Morgan Stanley's forecast for the quarter up to July is very detailed and generally in line with Wall Street's agreed expectations:

Revenue forecast was $29.4 billion, up 84.3% year over year and 32.5% month on month.

AI-specific revenue is forecast to be $16 billion (up 48% month-on-month), including $10.8 billion in custom ASIC business revenue and $5.2 billion in AI networking business revenue.

The gross margin forecast is 74.0%, slightly higher than Wall Street's general forecast of 73.5%.

Earnings per share forecast of $3.24 was slightly higher than the agreed estimate of $3.22.

This was an impressive quarter by any historical standard. However, Damo believes that investors need to take a little longer to look at the following set of data.

Broadcom already recorded $10.8 billion in AI chip revenue in the second quarter of fiscal year 2026, an increase of 143% year over year. According to Broadcom's Q2 earnings report, CEO Hock Tan (Hock Tan) gave Q3 guidance at the time: AI revenue would “increase by more than 200% year over year to reach $16 billion.”

As a result, the $16 billion AI revenue in the third quarter was no surprise; it was just the bottom line of performance that management had set.

According to the research report, for the fourth quarter guidance as of October, Morgan Stanley predicts that its revenue will reach US$34.8 billion (up 93.4% year over year), of which AI revenue will further accelerate its month-on-month growth by 32% to reach US$212 billion.

This number is where the real surprise that exceeds expectations is likely to come.

The 2027 controversy that really decided Broadcom's valuation

There is a more important focus for discussion, and it has nothing to do with this quarter's results.

Broadcom previously set its AI revenue guidance for fiscal year 2027 at a level “well above” $100 billion. Last quarter, management showed growing confidence and signalled that this growth will continue “deep into 2028.”

According to the research report, Morgan Stanley predicts AI revenue for the 2027 fiscal year to be around $120 billion. However, some investors' expectations have gradually climbed to $150 billion or more.

The difference between $120 billion and $150 billion is not just a debate about forecasting methods, but also differences in valuation logic. If it's $120 billion, Broadcom's valuation seems reasonable at the current share price level; but if it's $150 billion, this stock seems very cheap.

If the guidance given on September 2 implied an estimate of $120 billion, investors expecting to reach $150 billion would be disappointed, no matter how good the actual results of the quarter were.

Even Morgan Stanley mentioned this dynamic relationship in the research report: “The underlying business can continue to perform extremely well, but it may not exceed the most aggressive expectations.”

This is a politely worded warning reminding investors to the downside risks in this situation.

TPU supplier dispute

Another unanswered question worth answering is: is Google diversifying its custom chip suppliers from Broadcom to the outside world?

According to several recent reports, MediaTek participated in the Tensor Processing Unit (TPU) project, AMD participated in TPU v10, and Mywell Technology reached a share warrant agreement with Google. These are all seen as signs that the hyperscale cloud computing giant is expanding its ecosystem.

According to the research report, Dama's position remains unchanged. Supplier diversification does exist, but Broadcom's first mover and established advantage are extremely stable. The agency expects that even if Google introduces other alternative vendors, Broadcom will retain around 80% of its long-term TPU market opportunities.

The framework given by the analyst is: “If any, it is the fact that many semiconductor companies have arranged themselves around TPU, which further highlights the scale of this market opportunity.”

It's a very important perspective shift. When multiple leading chip companies compete for the same customer's share of custom chip projects, it doesn't mean that the market space is shrinking; on the contrary, it shows that the market is huge enough that everyone wants to share a share of the pie.

Research reports show that in Morgan Stanley's AI computing stock rankings, Broadcom (AVGO.US) is second only to its preferred target Nvidia (NVDA.US).

The significance of the third quarter earnings report goes beyond Broadcom's own industry background

There is also a background worth noting. Based on FactSet's data as of August 28, 2026, the semiconductor industry's newly announced profit for the second quarter of 2026 increased 142% year over year. In fact, this sector is the biggest contributor to the IT industry's overall profit growth.

If the semiconductor sector were excluded from IT industry calculations, the IT industry's overall profit growth rate would plummet from 75.3% to 38.3%. The dominant position of the chip industry cycle can be seen from this.

And Broadcom is at the center of this cycle. According to data as of the close of August, Broadcom's stock price has accumulated a 7.40% increase this year, while the S&P 500 index has risen 12.28% over the same period.

Over the past year, the stock's return on investment was 25.44%, and the return over the past three years was 316.02%. Performance since this year has lagged behind the market, reflecting a wave of sell-offs that occurred after the release of earnings reports exceeding expectations for the second quarter. This is a perfect example of the “anticipated risk” that Morgan Stanley once again warned of before the third-quarter earnings report.

The business is excellent, and the threshold is very high. These two things can be established at the same time. And on September 2, investors will know which side actually has the upper hand.