AI Spending Reality Check Triggers Sharp Pullback in Tech Giants: Broadcom and Oracle Under Pressure

The market’s honeymoon with AI infrastructure plays appears to be cooling. Following last week’s earnings announcements, Broadcom AVGO and Oracle ORCL have experienced significant declines exceeding 15%, despite delivering results that beat expectations on paper. What’s driving the drop? Investors are now wrestling with a fundamental question: Can these technology behemoths sustain profitability while simultaneously ramping up massive capital investments in data centers and AI clusters?

Oracle’s Ambitious Spending Plan Raises Red Flags

Oracle reported its fiscal Q2 earnings last week with a mixed narrative. While EPS surged 54% year-over-year to $2.26 per share—crushing consensus forecasts of $1.63 by a striking 38%—revenue told a different story. The company’s Q2 sales came in at $16.05 billion, falling short of the $16.14 billion estimate, even as top-line growth reached 14% compared to the prior year’s $14.05 billion.

The real market shock came from management’s capital expenditure guidance. Oracle announced plans to increase CapEx to approximately $50 billion in the coming year—a staggering $15 billion jump from earlier projections. While the company maintains robust cloud and AI deal pipelines, Wall Street has begun questioning whether such aggressive infrastructure spending remains sustainable. The debt financing required to support this buildout has traders concerned about long-term profitability implications.

Broadcom: When Margin Pressure Overshadows Impressive Growth

Broadcom painted an impressive fiscal Q4 picture on paper. Quarterly revenue jumped 28% to $18.01 billion, while earnings per share nearly doubled, climbing 37% to $1.95 from $1.42 year-over-year. The company also beat both sales estimates by 2.94% and earnings forecasts by 4.28%.

Yet the market’s enthusiasm evaporated when Broadcom issued its margin caution. Despite AI now representing more than half of the company’s semiconductor revenue—with AI chip sales accelerating 74% annually—management warned that expensive infrastructure expansions would compress gross margins going forward. The company holds multi-billion dollar contracts with leading AI firms Anthropic and OpenAI, yet has remained cryptic about specific capital allocation plans. Broadcom’s trailing 12-month CapEx of $623 million has stayed historically flat, appearing modest compared to the tens of billions Oracle and Nvidia NVDA are deploying. However, this very lack of transparency about future AI infrastructure investment triggered additional market disappointment.

The Valuation Recalibration: Are These Stocks Overshooting?

With both companies now facing investor skepticism regarding operational leverage amid heavy spending cycles, valuation metrics have suddenly become the central debate.

The recent selloff has actually brought valuations into more reasonable territory. Broadcom currently trades at approximately 39X forward earnings while Oracle sits at 27X—meaningful pullbacks from their decade-high multiples of 68X and 57X respectively, now aligning closer to their respective industry averages.

Price-to-forward sales multiples present a more nuanced picture. Broadcom’s 26X multiple looks expensive relative to its Electronics-Semiconductors industry average of 5X, suggesting room for further compression. Oracle’s 8X forward P/S ratio, by contrast, remains only moderately elevated compared to its Computer-Software industry peer average of 4X.

Encouraging for value-conscious investors: both stocks currently hover near the theoretically attractive PEG ratio threshold of 1.0, with Broadcom trading slightly beneath this mark. This suggests that despite recent weakness, their growth trajectories may still justify current valuations—assuming the AI spending thesis plays out successfully.

The Bottom Line: Hold for Now

The fundamental question facing both Broadcom and Oracle is whether their AI infrastructure investments will generate commensurate returns. Their balance sheets remain solid, and the AI secular tailwind remains intact. However, margin pressures, execution questions around revenue delivery, and uncertainty about CapEx payoff timelines have legitimately shaken investor confidence.

Both stocks currently warrant a Hold rating from a risk-reward perspective. The drop in share prices may have created a more attractive entry point, but investors should demand clarity from management on capital efficiency metrics before committing fresh capital.

The AI growth narrative remains compelling, yet the market’s skepticism about near-term profitability is not unfounded. This represents a healthy correction in sentiment rather than a fundamental breakdown in the AI opportunity itself.