(Bloomberg) — Pressure is on Broadcom Inc. ahead of Thursday’s earnings to show investors that AI demand will offset a slump in computer and telephone sales.
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With a gain of nearly 50% since its last quarterly report, the stakes have ratcheted up for the Palo Alto, California-based company at a time when the likes of Advanced Micro Devices Inc. and Super Micro Computer Inc. have been bid up on expectations that demand for hardware used in AI computing is just beginning. The shares rose as much as 2.8% at market open in New York.
Scrutiny is on such firms, as concerns mount that the broader market rally looks more like a bubble than the early innings of a major growth cycle. Any signs of weakness could trigger a dash for the exit in some of the largest tech stocks, potentially sparking a broader selloff.
“Broadcom and a lot of names like it have benefited from the AI hype cycle a lot and so we think the bar is pretty high for them,” going into earnings, said David Klink, senior equity analyst at Huntington National Bank.
Options point to a possible stock swing of 7% in either direction, which would be Broadcom’s biggest post-earnings move since 2021, according to data compiled by Bloomberg. The firm’s market capitalization pushed past that of Tesla Inc. last week, and the stock trades near an all-time high.
Wall Street expects first quarter 2024 revenue of $11.6 billion, a 30% jump from a year earlier. The company’s forward guidance will also be closely watched – investors hope Broadcom reiterates that its relationships with chip customers are strong.
“We are never concerned with quarter by quarter drama but at the same time we are looking at what they are saying on a forward basis,” said David Bahnsen, chief investment officer at The Bahnsen Group.
Investors also expect an update on the company’s VMware LLC acquisition and its other lines of business outside chipmaking. Broadcom’s diverse group of acquisitions sets it apart from other AI companies, which are more focused. While some view these multiple lines as downside protection in the event of an AI-driven selloff, it could also cap potential gains as the rally grinds higher.
“What they’re going to try to do, because they did this last quarter, is emphasize their ties to AI,” said Kim Forrest, chief investment officer at Bokeh Capital Partners LLC. “I don’t think it’s strong enough for them to survive all the other businesses because they are not growing like generative AI.”
Read more: Broadcom CEO Expects AI Windfall Even as Sales Growth Slows
Bulls point to Broadcom’s valuation. It trades at 27 times forward earnings, cheaper than AI peers like Nvidia at 34 and AMD at about 51.
“The worry with Broadcom is that once the AI luster wears off a bit you got to actually look at the other businesses behind it,” Klink said. “We’re optimistic on it but we would think that it would be a little more at risk than some of the maybe top chip guys, like AMD or Nvidia.”
Tech Chart of the Day
Options trading in semiconductor stocks is exploding as investors bet on the hottest thing in equity markets these days: artificial intelligence. Daily average notional volume in single stock puts and calls for members of the Philadelphia Semiconductor Index exceeded $145 billion in February — about double the average at the end of 2023 and seven times higher than a year earlier.
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–With assistance from Jan-Patrick Barnert.
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