Memory costs compress Broadcom gross margins despite record AI chip sales

Broadcom's third-quarter earnings revealed a significant headwind for profitability: rising memory prices are squeezing gross margins as the company's AI accelerators require increasingly large amounts of high-bandwidth memory. Gross margin fell from 77.1% in Q2 to 75% in Q3 and is expected to decline further to 73% in Q4, representing 410 basis points of compression over two quarters at a time when revenue growth is accelerating. Chief Financial Officer Amie O'Toole attributed the decline to the growing mix of XPUs with their increased memory content. The compression coincides with a structural tightening in memory supply: DRAM prices surged 90-95% quarter-over-quarter in early 2026, the steepest increase on record, while three companies control over 95% of DRAM output and have shifted capacity toward high-bandwidth memory. CEO Hock Tan indicated the company factors memory, substrate, and wafer availability into its revenue forecasts and is even building additional substrate capacity in Singapore to address the bottleneck.

1. Q3 gross margin of 75%, down 210 basis points sequentially from Q2's 77.1%
2. Q4 guidance: gross margin approximately 73%, down from 78% a year ago
3. AI semiconductor revenue reached $16.7 billion in Q3, up 221% year-over-year
4. DRAM prices rose 90-95% in Q1 2026, the steepest single-quarter move recorded by TrendForce
5. SK Hynix, Micron, and Samsung Electronics control over 95% of DRAM output
6. CEO said frontier-model customers are driving AI chip performance higher, requiring more memory and bandwidth
7. Company building additional substrate capacity in Singapore to address supply constraints
8. Total revenue of $29.6 billion in Q3, up 86% year-over-year, beat consensus of $29.36 billion