Broadcom stock (NASDAQ: AVGO) tumbled roughly 5% on Wednesday following Reuters reports that Chinese authorities instructed domestic companies to stop using cybersecurity software from about a dozen US and Israeli vendors.
The list includes Broadcom-owned VMware and compounded already fragile investor sentiment around margin compression.
The sharp sell-off underscores how vulnerable growth stocks remain to geopolitical shocks, particularly when they hinge on China exposure.
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According to Reuters sources, Chinese officials recently directed local companies to phase out security software from Broadcom’s VMware, alongside Palo Alto Networks, Fortinet, and Israel’s Check Point Software.
The officials cited national security concerns, fearing that foreign-made tools could collect sensitive data and transmit confidential information abroad.
However, neither the Chinese government nor the affected companies had issued formal statements confirming the directive’s scope or enforcement timeline at the time of the report.
Reuters acknowledged it could not independently verify how many Chinese companies actually received the directive.
The impact cascaded across the cybersecurity sector.
Palo Alto Networks fell 2.5%, Fortinet declined 2.3%, while Broadcom bore the steepest decline at 5%.
The disparity reflects investor concerns about VMware’s exposure to the Chinese market.
Broadcom maintains six offices across China and has built substantial enterprise customer relationships through its software division.
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The Chinese cybersecurity ban arrived when Broadcom was already under pressure.
In early December, the company reported blowout fourth-quarter results: revenue of $18 billion, up 28% year-over-year, and AI semiconductor revenue surging 74%.
Management guided to $19.1 billion in revenue for the next quarter, handily beating expectations.
Yet the stock fell nearly 5% in extended trading that day, then continued sliding through mid-January, a cumulative 14% decline since December 11.
The culprit was management’s warning that gross margins would decline by 100 basis points (1% point) in the coming quarter, driven by an expanding mix of AI revenue.
Broadcom sells custom AI chips bundled as complete systems with third-party memory and components.
This approach boosts revenue but squeezes margins because the additional component costs are passed through to customers.
With a $73 billion AI backlog and an estimated $21 billion in orders from AI company Anthropic, investors feared that much of the backlog is priced at lower-margin system configurations.
Management argued that while gross margins would compress, operating margins, the truer measure of profitability, would hold relatively steady due to operating leverage.
But on Wall Street, growth paired with margin deterioration is viewed as lower quality, and investors punished the stock accordingly.
The Chinese cybersecurity directive taps into that existing anxiety.
Investors now fear that not only will AI margins stay under pressure, but VMware revenue from China could evaporate if the ban is enforced.
Yet analysts remain divided. Some question whether the directive constitutes a meaningful enforcement risk.
Others note that Broadcom’s $73 billion AI backlog and 100% expected year-over-year AI revenue growth through 2026 provide a strong floor beneath earnings.
