Broadcom shares tumble 14% as investors demand higher AI guidance
The US chipmaker reported $22.2 billion in second-quarter revenue, yet the market punished the stock for maintaining its full-year artificial intelligence outlook at $100 billion.
Broadcom shares fell as much as 14% on Thursday following the release of its second-quarter earnings results, which had been released the previous evening. The company reported revenue of $22.2 billion, a 48% increase year-on-year that surpassed analyst estimates. Despite the strong top-line performance, the share price decline was driven by investor disappointment that chief executive Hock Tan did not raise the company's full-year artificial intelligence chip revenue guidance, which remains set at "in excess of $100 billion".
The decision to maintain the existing guidance, rather than increase it from the first-quarter report, triggered a sell-off that dragged a handful of other artificial intelligence technology stocks lower. Investors had anticipated a more aggressive outlook from the chief executive, and the lack of upward revision provided a catalyst for profit-taking among those who had priced in higher growth expectations.
Prior to the decline, Broadcom shares were trading at 37 times expected earnings for the current year and 22 times profit projections for the following year. Following the drop, the valuation adjusted to approximately 20 times next year's expected earnings, with the share price settling just below $400. The Motley Fool’s analyst community had previously collectively valued the stock at $505.75 per share, indicating that the current price is well below prior consensus targets.
The sell-off reflects a broader correction of overvalued artificial intelligence stocks rather than a fundamental issue with the industry itself. Data from Yardeni Research indicates that the "Magnificent Seven" stocks, which have significant exposure to the artificial intelligence sector, boast an average forward-looking price-to-earnings ratio of 26.3. This compares to an average of only 19.2 for the rest of the S&P 500, suggesting that many investors are uncomfortable with the premium valuations attached to these names.
Even at the lowest possible figure of $100 billion, the guidance implies substantial growth, as last year’s total top-line revenue was $63.9 billion. With approximately 40% of Broadcom’s previous revenue coming from software, artificial intelligence chip revenue alone would represent significant expansion. The market appears to be dialing back valuations to levels that better reflect an industry that is still evolving in unpredictable ways, rather than signaling a collapse in demand.
