Broadcom Stock Tumbles 7% as Redburn Downgrade Flags $43 Billion AI Backstop Risk, Ending a 25% Rally

Broadcom shares fell sharply Friday after Rothschild & Co Redburn downgraded the chipmaker and warned about its growing exposure to financing for artificial intelligence data centers. The drop wiped out a chunk of a rally that had lifted the stock about 25% in five sessions.

Broadcom traded at $339.20 at 11:17 a.m. ET on the Nasdaq, down $25.16, or 6.91%, from Thursday's close of about $364.36. It was among the biggest decliners in a broad sell-off in semiconductor stocks.

Downgrade cites AI financing exposure

Redburn cut Broadcom to Neutral from Buy and lowered its price target by 33%, to $398 from $595.

The firm's main concern is a financial guarantee Broadcom has provided on leases of AI computing racks, an arrangement widely reported to involve AI developer Anthropic. Analysts argued the exposure could become a meaningful financial risk if Anthropic or other frontier AI labs fail to become financially self-sufficient.

Redburn also questioned this week's rally. It called the recent shift of investor money toward Broadcom "a trade on sentiment rather than a confirmed structural change." The firm said Broadcom could still benefit if its concerns are resolved, but expects that process to take time.

What is the $43 billion backstop?

Broadcom disclosed the arrangement in an Oct. 27 filing with the Securities and Exchange Commission.

Under the deal, financial partners took over agreements to buy AI racks built on Broadcom's custom AI accelerators, along with the related leases with a Broadcom customer. Bank of America, Blackstone, Citi and Morgan Stanley announced a $63 billion financing package to buy Broadcom's chips and networking equipment and lease them to Anthropic.

Broadcom provides what it calls residual value support. If the customer defaults on its lease, Broadcom covers any gap between 72.5% of the outstanding lease amount and what the racks fetch on sale.

"The Company's maximum potential liability under the Backstop upon the deployment of the AI racks, on an undiscounted basis, is approximately $43 billion," Broadcom said in the filing.

Broadcom said the backstop is a contingent liability "the Company believes has a low probability of occurring." It cited "the expectation of a strong profitability trajectory of the customer and the sustaining value of the underlying assets."

The exposure grows as racks are delivered and shrinks as the customer makes lease payments. If a default occurs, Broadcom said it could take over the lease, resell the racks to the seller at a fixed price under certain conditions, or arrange a sale.

It is Broadcom's second such arrangement. In June, it set up a similar backstop with investment firm Apollo, with a maximum exposure of $29 billion. Broadcom has not said whether the two exposures are separate. If they are, the combined maximum would be about $72 billion. Broadcom held about $24 billion in cash as of Aug. 2.

Rally fueled by Nvidia turmoil

The downgrade hit after a sharp run-up. Broadcom shares closed at $293.69 on Nov. 6 and climbed more than 20% in four days, one of the stock's strongest short-term runs in years.

Much of that rally was tied to turmoil at rival Nvidia, whose chief executive, Jensen Huang, resigned Thursday after an affair scandal. Some investors moved money out of Nvidia on the expectation that big cloud companies would speed up development of custom AI chips with Broadcom and other suppliers.

On Friday, that trade partly reversed. Nvidia shares fell again, AMD dropped about 9% and Intel about 5%. The Nasdaq composite fell about 1% and the S&P 500 about 0.6% as investors digested new inflation data.

Strong growth, high expectations

Broadcom's AI business has grown rapidly. AI semiconductor revenue rose 221% to $16.7 billion last quarter. Management is targeting $115 billion in AI revenue in fiscal 2027, a figure bulls cite as a reason to stay invested.

The company forecast fourth-quarter revenue of $34.8 billion, slightly below the $35.03 billion analysts expected, with AI revenue expected to reach $21.7 billion. Broadcom is scheduled to report results on Dec. 10.

Despite Friday's downgrade, Wall Street remains largely bullish. Twenty-nine of 31 analysts covering Broadcom still rate the stock a Buy.

The stock remains well below its 52-week high of $495, and above its 52-week low of $289.77.

A new kind of risk for chipmakers

The backstop debate reflects a broader shift in the AI industry. As AI developers race to build computing capacity, chipmakers and their financial partners are using increasingly complex financing to help customers pay for expensive hardware.

Supporters say such arrangements help lock in orders and speed up deployment of AI infrastructure. Critics warn they tie chip suppliers' fortunes more closely to the finances of AI startups that are still burning large amounts of cash.

Broadcom is also reportedly weighing more than $50 billion in financing to help OpenAI buy chips.

Investors will look to Broadcom's Dec. 10 earnings for updates on AI demand, its financing arrangements and whether its custom chip business can keep its momentum.

This article is for informational purposes only and does not constitute investment advice.