Broadcom (NASDAQ:AVGO) Stocks plunged Thursday following the release of second-quarter results the night before. The numbers were good; Revenue of $22.2 billion rose 48% year over year, beating estimates. But the orientation was disappointing…sort of.
CEO Hock Tan only reiterated the company’s ambiguous expectations for full-year artificial intelligence (AI) chip revenue of “more than $100 billion” based on its first-quarter report. Investors wanted Broadcom to raise its own bar. When it didn’t, they rebelled, sending Broadcom shares down as much as 14% and dragging a handful of other AI technology stocks down with them.
Did Nvidia miss out in 2009? This rare signal flashes again. In 2009, a “double down” signal appeared for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company that is 1/100th the size of Nvidia. Continue “
A growing number of investors appear to fear that this single-day setback could mark the beginning of prolonged weakness stemming from the lack of clear, practical value from AI. After all, most of Broadcom’s business comes from other AI companies building capabilities in the mere hope that enough real business will follow. If this concern is legitimate, a radical correction is likely sooner rather than later.
However, this line of thinking could be said to overstate what is really happening here and now with Broadcom. The future of the AI industry is legitimately bright. It’s just that most investors (perhaps without even knowing it) innately feel that too many AI stocks have gotten more than a little ahead of themselves on price. Broadcom simply provided the excuse needed to start properly pricing these tickers.
Just routine correct pricing
Broadcom shares are currently priced at 37 times this year’s expected earnings, looking ahead, and 22 times analysts’ earnings projections for next year. Both are unusually high (although the 2027 valuation isn’t exactly outrageous).
And Broadcom is not alone. Figures from Yardeni Research highlight that the “Magnificent Seven” stocks, all of which have something to do with the AI business, have an average forward price/earnings ratio of 26.3, compared to an average of just 19.2 for all other names in the sector. S&P 500 (SNPINDEX: ^GSPC). Even if they don’t recognize it, this can make many investors unconsciously uncomfortable. They have simply been waiting for the right catalyst to initiate the price correction that most AI tickers need right now.