$150 Billion Revenue Becomes AI Business Watershed! Morgan Stanley Maintains "Overweight" Rating on Broadcom (AVGO.US), Warns that Success Depends Entirely on Expectation Gap

According to The Intelligent Investor APP, Broadcom (AVGO.US) will announce its fiscal 2026 Q3 earnings after the US market closes on September 2nd (early morning September 3rd, Beijing time). Its financial results are almost certain to be very impressive. Morgan Stanley has made it clear that the real question is whether simply being “impressive” is enough.

This was the situation heading into Q3. The key issue is not whether Broadcom can deliver strong results, but whether it can cross the very high bar that some investors have privately set—raising expectations for fiscal 2027 AI revenue to over $150 billion. In contrast, Morgan Stanley forecasts $120 billion.

The risk of short-term volatility lies precisely in the gap between these two numbers. Remember: Q2 was a cautionary tale—when market expectations are too high, even exceptionally strong results may not satisfy investors.

Morgan Stanley maintains an “Overweight” rating on Broadcom. But the title of the report is noteworthy: “The main pre-earnings risk is market expectations, not fundamentals.”

The report shows that Morgan Stanley's forecasts for the quarter ending in July are very detailed and roughly in line with Wall Street consensus:

Revenue forecast at $29.4 billion, up 84.3% year-over-year and 32.5% sequentially.

AI-specific revenue is projected at $16.0 billion (up 48% quarter-on-quarter), including $10.8 billion from custom ASICs and $5.2 billion from AI networking.

Gross margin forecast at 74.0%, slightly higher than the Street consensus of 73.5%.

EPS forecast at $3.24, slightly above the consensus forecast of $3.22.

By any historical standard, this is an extraordinary quarter. But Morgan Stanley believes investors need to spend a little more time examining the following data.

In fiscal 2026 Q2, Broadcom delivered $10.8 billion in AI chip revenue, up 143% year-over-year. According to Broadcom’s Q2 earnings report, CEO Hock Tan’s guidance for Q3 at the time was: AI revenue will “grow over 200% year-over-year, reaching $16 billion.”

Therefore, Q3’s $16 billion AI revenue is not much of a surprise—it’s merely the baseline set by management.

The report points out that for guidance on the quarter ending in October, Morgan Stanley forecasts revenue to reach $34.8 billion (up 93.4% year-over-year), with AI revenue accelerating another 32% quarter-over-quarter, reaching $21.2 billion.

This number could truly deliver an upside earnings surprise.

The Real 2027 Valuation Debate for Broadcom

There is also a more important focal point for discussion—and it has nothing to do with this quarter’s earnings.

Broadcom previously set fiscal 2027 AI revenue guidance at “well above” $10 billion. In the last quarter, management showed growing confidence and signaled the growth momentum will extend “well into 2028.”

The report indicates Morgan Stanley expects fiscal 2027 AI revenue to be around $12 billion. However, some investors’ expectations have climbed to $15 billion and above.

The divergence between $12 billion and $15 billion is not just about forecasting methods; it’s about valuation logic. If it’s $12 billion, Broadcom’s current valuation appears reasonable. If it’s $15 billion, the stock looks very cheap.

If the guidance on September 2nd implies $12 billion, then no matter how strong this quarter’s actual results are, investors expecting $15 billion will be disappointed.

Even Morgan Stanley mentions this dynamic: “The underlying business can continue to perform extremely well, but may still fall short of the most aggressive expectations.”

This is a politely worded warning, reminding investors of the downside risk in such a situation.

TPU Supplier Competition

Another open question worth addressing is: Is Google diversifying its custom chip suppliers away from Broadcom?

Several recent reports indicate that MediaTek is involved in the Tensor Processing Unit (TPU) project, AMD is working on TPU v10, and Marvell Technology has signed a warrant agreement with Google. All of these are seen as signals that this hyperscale cloud computing giant is expanding its ecosystem.

According to the report, Morgan Stanley’s position remains unchanged. Supplier diversification is indeed happening, but Broadcom’s first-mover and incumbent advantages are extremely solid. The firm estimates that even if Google introduces alternative suppliers, Broadcom will retain about 80% of the long-term TPU market opportunity.

The analysts’ framework is: “If anything, the fact that multiple semiconductor companies are working around TPUs further highlights the sheer size of this opportunity.”

This is an important shift in perspective. The fact that many leading chip companies are competing for the same customer’s custom chip project doesn’t mean the market is shrinking; rather, it shows that the market is so large, everyone wants a piece of the pie.

The report notes that in Morgan Stanley’s AI compute stock rankings, Broadcom (AVGO.US) ranks second, right behind its top pick Nvidia (NVDA.US).

The Q3 Earnings’ Industry Significance Goes Beyond Broadcom Itself

There’s another important background. Based on FactSet data as of August 28, 2026, the semiconductor industry’s just-reported fiscal Q2 earnings grew 142% year-over-year. In fact, the semiconductor sector is the largest contributor to overall IT industry profit growth.

Exclude the semiconductor sector from the IT industry’s calculations, and overall profit growth would plunge from 75.3% to 38.3%. The dominant role of the chip cycle is obvious.

And Broadcom stands at the center of this cycle. As of the end of August, Broadcom’s share price is up 7.40% year-to-date, compared to the S&P 500’s gain of 12.28% over the same period.

In the past year, Broadcom’s return is 25.44%. Its three-year return is a massive 316.02%. Its underperformance so far this year reflects the sell-off that followed the blowout Q2 earnings. This perfectly demonstrates the “expectations risk” that Morgan Stanley is once again warning about ahead of the Q3 results.

The business is exceptional, and the bar is set extremely high. Both statements can be true. On September 2, investors will find out which side wins out.