Broadcom (NASDAQ: AVGO) shares crashed on Thursday following the release of its Q2 results the previous evening. The numbers were fine; revenue of $22.2 billion was up 48% year over year, topping estimates. But guidance disappointed… sort of.
CEO Hock Tan only reiterated the company’s ambiguous expectations for full-year artificial intelligence (AI) chip revenue of “in excess of $100 billion” from its Q1 report. Investors wanted Broadcom to raise its own bar. When it didn’t, they revolted, sending Broadcom shares as much as 14% lower, and dragging a handful of other AI tech stocks down with it.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
A growing number of investors seem to fear this single-day setback could mark the beginning of prolonged weakness stemming from AI’s lack of clear, practical value. After all, most of Broadcom’s business comes from other AI companies building capacity on the mere hope that enough actual business will follow. If this worry is legitimate, a sweeping correction is likely to come sooner rather than later.
This line of thinking arguably overstates what’s actually happening here and now with Broadcom, however. The AI industry’s future is legitimately bright. It’s just that most investors (perhaps without even knowing it) innately feel too many artificial intelligence stocks have gotten more than a little ahead of themselves price-wise. Broadcom simply provided the excuse needed to start right-pricing these tickers.
Just a routine right-pricing
Broadcom shares are currently priced at 37 times this year’s expected earnings, for perspective, and 22 times analysts’ profit projections for next year. Both are unusually high (although the 2027 valuation isn’t exactly outrageous).
And Broadcom isn’t alone. Numbers from Yardeni Research highlight the “Magnificent Seven” stocks — all of which have a hand in the AI business — boast an average forward-looking price/earnings ratio of 26.3, versus an average of only 19.2 for every other name in the S&P 500 (SNPINDEX: ^GSPC). Even if they don’t recognize it, this may be making many investors subconsciously uncomfortable. They’ve simply been waiting for the right catalyst to start the price correction that most AI tickers need at this time.
