One of the leading AI stocks saw its stock price plummet Friday, even though it beat earnings estimates. Is it time to buy?
The correction among growth stocks continued Friday, as another high flying tech name, Broadcom (NASDAQ:AVGO), saw its stock price drop nearly 10% despite solid earnings.
Broadcom, a semiconductor stock that specializes in AI chips, generated $13.07 billion in revenue in the fiscal third quarter, which is up 47% year over year. That was better than the $13.03 billion revenue estimates by analysts.
The company reported a net loss of $1.87 billion in the quarter, which was way below a $3.3 billion gain in the same quarter a year ago. But the loss was due to a one-time $4.5 billion tax provision from an intra-group transfer of certain IP rights to the United States.
On an adjusted basis, Broadcom saw net income rise 32% year over year to $6.1 billion, or $1.24 per share, which beat estimates of $1.22 per share.
Broadcom didn’t exactly crush estimates, but the numbers probably shouldn’t warrant such a steep selloff. But Friday’s selloff likely had to do with other factors.
Earnings beat led by AI chips, VMware revenue
Broadcom has been riding the AI wave in recent years, as a maker of chips that facilitate the movement of data across networks, mainly mobile and broadband networks. It is different from NVIDIA and other chipmakers, that create GPUs and CPUs for computers, cars, smartphones, and other devices.
Its growth in recent years has been fueled by the AI boom, as its chips are built to handle AI-related data.
“Broadcom’s third quarter results reflect continued strength in our AI semiconductor solutions and VMware,” said Hock Tan, president and CEO of Broadcom, in the fiscal third quarter earnings report.
Tan said the company expects the company to generate $12 billion in revenue from AI in fiscal 2024, driven by Ethernet networking and accelerators for AI data centers. This is up from the previous guidance of $11 billion for its AI chips.
But it also got a big revenue boost from its acquisition of VMware, a cloud computing firm that it acquired late last year.
“Consolidated revenue grew 47% year-over-year to $13.1 billion, including the contribution from VMware, and was up 4% year-over-year, excluding VMware,” said CFO Kirsten Spears, illustrating the impact of VMWare on revenue.
Why was Broadcom stock down?
There were probably a few reasons why investors weren’t thrilled with the earnings report. While AI and VMware fueled revenue, the company’s non-AI networking revenue was down 41% year over year, although it was up 17% from the previous quarter.
Also, its broadband revenue was down 49% year over year. While this represents only about 8% of semiconductor revenue, it is a sharp decline, and it is expected to remain weak on a continued pause in telecommunications and service provider spending.
“In Q4, we expect broadband to continue to be down over 40% year on year, but we do expect that recovery to begin in ’25,” Tan said.
That leads to the other reason why Broadcom stock was dropping on Friday. The company guided for $14 billion in revenue in the fourth quarter, which was slightly below the $14.13 that analysts were projecting. However, that would be up 51% from the same quarter a year ago and would raise fiscal 2024 revenue to $51.5 billion.
Also, Broadcom targeted adjusted EBITDA to be 64% of revenue, up slightly from 63% in Q3.
Is Broadcom stock a buy?
The P/E ratio spiked after earnings, but that is because of the net loss due to the one-time tax provision. Overall, the stock had been fairly reasonably valued, considering its huge growth.
Broadcom stock is up 27%, even after Friday’s selloff, and analysts still are bullish, with a median price target of $196 per share, suggesting a 42% increase. The stock even got several price target upgrades on Saturday.
I think the selloff on Friday is overblown, perhaps related to the unemployment numbers, or the overvalued tech sector in general. The outlook miss is not all that concerning, given that expectations have grown exceedingly high for AI stocks like Broadcom.
I certainly wouldn’t sell the stock, which has had an average annualized return of 36% over the past five years and 32% over the past 10 years.
In fact, today’s selloff is probably a decent opportunity to consider one the top AI stocks out there.
