Broadcom’s Earnings will be a Key Test for the AI Rally

(Bloomberg) — Broadcom Inc. is under pressure ahead of its Thursday earnings report to demonstrate to investors that there will be enough interest in artificial intelligence to make up for a decline in computer and phone sales.

Most Viewed Stories from Bloomberg

With a rise of over 50% since its last quarterly statement, the stakes have intensified for the company based in Palo Alto, California, as companies like Advanced Micro Devices Inc. and Super Micro Computer Inc. have been bid up on beliefs that demand for hardware used in AI computing is just getting started. Broadcom’s shares climbed by as much as 3.7% during the day.

Attention is focused on such companies, amid worries that the broader market surge may resemble a bubble rather than the early stages of a significant growth cycle. Any indications of weakness could trigger a rush to sell off some of the largest technology stocks, potentially leading to a broader market decline.

“Broadcom and many other similar companies have profited greatly from the hype surrounding AI, so we believe the expectations are quite high for them,” said David Klink, senior equity analyst at Huntington National Bank, ahead of the earnings report.

Learn more: ‘Frenzy’ for Nvidia and Other AI Chip Stocks Has Mizuho Apprehensive

Options suggest the potential for a 7% swing in either direction in the stock, which would be Broadcom’s largest post-earnings movement since 2021, based on data compiled by Bloomberg. The company’s market value surpassed that of Tesla Inc. last week, and its shares are trading near an all-time high.

Wall Street anticipates revenue for the first quarter of 2024 to be $11.8 billion, representing more than a 30% increase from the previous year. Investors will also closely monitor the company’s forward guidance, hoping that Broadcom will confirm the strength of its relationships with chip customers.

“We are not overly concerned with the short-term drama, but at the same time, we are looking at their forward-looking statements,” said David Bahnsen, chief investment officer at The Bahnsen Group.

Investors are also expecting an update on Broadcom’s acquisition of VMware and its other business lines outside of chip production. Broadcom’s diverse array of acquisitions distinguishes it from other AI companies that are more focused. While some see these various lines as protection against a downturn driven by AI, it could also limit potential gains as the rally continues.

“They will likely try to emphasize their ties to AI, as they did last quarter,” said Kim Forrest, chief investment officer at Bokeh Capital Partners LLC. “However, I don’t believe this will be enough for them to compete with other businesses that are not growing like generative AI.”

Read more: Broadcom CEO Expects AI Windfall Even as Sales Growth Slows

Bulls highlight Broadcom’s valuation. The company trades at around 28 times forward earnings, which is lower than AI competitors such as Nvidia at 37 and AMD at roughly 54.

“The concern with Broadcom is that once the initial excitement about AI fades, attention will shift to its other businesses,” Klink said. “We are optimistic about it, but we believe it may be more vulnerable than other top chip companies like AMD or Nvidia.”

Tech Chart of the Day

Options trading in semiconductor stocks is surging as investors bet on the hottest trend in the equity markets these days: artificial intelligence. The daily average notional volume for single stock puts and calls among members of the Philadelphia Semiconductor Index exceeded $145 billion in February — nearly double the average at the end of 2023 and seven times higher than a year earlier.

Top Tech News

  • Concerns that Nvidia Corp.’s remarkable gains could be unsustainable are spreading to ESG investment managers who outperformed the market last year by betting heavily on the stock.

  • SK Hynix Inc. is increasing its investment in advanced chip packaging in hopes of capturing a larger share of the growing demand for high-bandwidth memory, a crucial component in AI development.

  • The US government is urging allies such as the Netherlands, Germany, South Korea, and Japan to further restrict China’s access to semiconductor technology, a controversial initiative that is meeting resistance in some countries, according to sources.

  • Apple’s car program costs an average of approximately $1 billion per year (almost a fifth of Apple’s research and development budget ten years ago), with external teams for chips, camera sensors, cloud services, and software adding hundreds of millions of dollars more to the annual expenditure.

  • A Chinese software engineer at Alphabet Inc.’s Google has been accused by the US Justice Department of stealing trade secrets to develop artificial intelligence from the company’s supercomputing data centers.

Thursday’s Earnings

  • After Hours

    • Broadcom

    • Marvell Technology

    • MongoDB

    • Samsara

    • DocuSign

    • Guidewire

    • Grindr

–With assistance from Jan-Patrick Barnert.

(Updates stock moves throughout.)

Most Viewed Stories from Bloomberg Businessweek

©2024 Bloomberg L.P.

Leave a Reply

Your email address will not be published. Required fields are marked *