Shares of chipmaker Broadcom experienced a significant decline of more than 7% during early trading on Friday, following the announcement of a tepid revenue forecast. This dampened investors' expectations of robust demand for artificial intelligence (AI) chips and its potential to drive strong growth. The semiconductor industry, particularly chipmakers, has been under pressure due to Wall Street's sky-high expectations after a prolonged rally in semiconductor stocks. Investors have heavily bet on the hardware supporting generative AI technology.

On Thursday, Broadcom reported considerable declines in revenues from its broadband and non-AI networking divisions. Although the company increased its sales forecast for AI chips by $1 billion for the fiscal year ending in October, this boost aligned with widespread predictions. Investors, hungry for growth, were left unimpressed. Notably, Broadcom's shares have already surged by more than 35% this year.

Analyst Angelo Zino from CFRA Research attributes the drop in Broadcom's shares to the "lack of upside in estimates" and the seemingly underwhelming outlook in AI revenue, coupled with uninspiring semiconductor segment revenue. As a result, if losses persist, the company stands to lose a staggering $54 billion in market value.

Despite the overall disappointment, artificial intelligence-linked chips remain a bright spot for Broadcom. Leading tech companies are investing in the necessary data center infrastructure to support the immense volumes of data utilized by AI models. However, due to its reliance on a limited number of customers who tend to make substantial capital expenditures, Broadcom's custom AI chip business could see inconsistent growth.

Although the company's three custom AI chip clients remain unidentified, sources claim that Broadcom is the provider behind Alphabet's TPU chips utilized in the tech giant's expansive data center network. Analysts from Morgan Stanley acknowledge that Broadcom's AI revenue may experience intermittent growth but anticipate a still-strong performance this year. In fact, the company's AI chip revenue is projected to rise by 10% sequentially to over $3.5 billion in the current quarter.

When compared to AI chip giant Nvidia, Broadcom's shares were valued at around 26 times forward earnings expectations, while Nvidia stands at approximately 30. Other chip stocks, including Nvidia, Advanced Micro Devices, and Micron Tech, remained relatively flat in the wake of Broadcom's decline.

While Broadcom's semiconductor segment revenue saw a year-on-year growth of 5% in the quarter ending in July, it only experienced a 1% increase from the previous quarter. This drop in Broadcom's stock adds to the waning market enthusiasm for artificial intelligence, despite ongoing investments from major tech companies in AI development. As an industry barometer, Nvidia shares also suffered, losing over 7% last week, further fueled by Nvidia's lackluster forecast.

In a highly competitive and evolving semiconductor landscape, Broadcom seeks to regain investor confidence and capitalize on the steady growth in demand for AI chips.