(Dec 11): Broadcom Inc has been one of the hottest stocks in the market this year, driven by the enthusiasm for all things artificial intelligence (AI). But with its quarterly earnings due after the close on Thursday, investors are wondering if that will be enough to power the next leg of the rally.
“Our fear is that it’s kind of primed for disappointment,” said Peter Sorrentino, manager of global growth equity strategy at Huntington National Bank, which holds Broadcom shares.
The chipmaker’s stock price has soared more than 180% since bottoming on April 4, making it the tenth-best performer in the S&P 500 Index over that time, and is up 35% since the company’s last earnings report in September. It closed at a record on Wednesday.
The enthusiasm is based on the central role the custom chips made by Broadcom for customers like Alphabet Inc’s Google are playing in the buildout of AI data centres. It has accomplished this while other infrastructure stocks — including Nvidia Corp, Oracle Corp and Advanced Micro Devices Inc — have struggled.
Oracle shares tumbled more than 11% in premarket trading on Thursday after its fiscal second-quarter results showed a jump in spending on AI data centres and its cloud growth forecast for the upcoming quarter fell short of analyst expectations.
But it’s also made the stock pricier than it has ever been, with a valuation of about 42 times forward earnings, compared with its 10-year average multiple of 17. Broadcom shares are now more expensive than every one of the Magnificent Seven tech giants except Tesla Inc.
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“We’ve got investors out a little over their skis here,” Sorrentino said, noting that his firm hasn’t added to its Broadcom position “in this price run over the last six months”.
Analysts expect the company to report US$1.87 in adjusted earnings per share for its fiscal fourth quarter, which ended Oct 31, up from US$1.42 a year ago. Revenue is projected to rise to about US$17.5 billion compared with US$14.1 billion a year earlier. About US$6.2 billion of this quarter’s revenue is expected to come from the company’s AI segment, a roughly 68% jump.
“Expectations here are obviously elevated given the recent performance, but for good reason,” said Shaon Baqui, a technology research analyst at Janus Henderson Investors, which holds Broadcom shares across multiple portfolios. “They’re significantly levered to the Google ecosystem, and we all see the recent success around Gemini 3 and what Google’s been able to do.”
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Beyond the numbers, investors like Baqui will be most interested in the comments from chief executive officer Hock Tan on the company’s earnings call.
“The investor community here has taken sort of an ‘in Hock we trust’ approach,” Baqui said. “He manages to pull a rabbit out of the hat every quarter and surprise with something new.”
Last quarter’s surprise was a new customer with orders totalling more than US$10 billion. Shares jumped 9.4% the day after the report to close at a record. Announcing another new customer would mollify the concerns of some analysts and investors, who are growing alarmed by all the spending by a small group of hyperscalers.
“Strength in TPU orders should power Broadcom’s estimates higher through next year. Long-term, we would still prefer success with a diverse set of customers for Broadcom across its seven ‘hyperscale’ opportunities,’” Melius analyst Ben Reitzes wrote in a note on Dec 8.
And, while AI is front and centre, signs of recovery in the other parts of Broadcom’s business are also important to Wall Street. Investors will be looking for updates on software as well as enterprise storage, broadband and wireless communication.
But regardless of what the company says or reports, Broadcom’s scorching stock market valuation may have reached a point where even blowout earnings could become a sell the news event for the market.
“Everybody’s long and maybe some people are gonna sell off just for profit taking,” Gabelli Funds analyst Ryuta Makino said.
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