Is Broadcom Stock in Trouble?
Key Points
A couple of underwhelming earnings reports have weighed on Broadcom's stock of late.
The business, however, continues to experience strong growth due to artificial intelligence.
The stock's valuation looks light compared to the average stock on the S&P 500.
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Broadcom (NASDAQ:AVGO)'s stock has soared close to 600% over the past five years. But lately, things haven't been as rosy for the custom chipmaker. After reaching highs of nearly $500 earlier this year, the stock has struggled to get back to anywhere near those levels again; currently, it's down around 30% from its 52-week high.
Between a high valuation, high expectations, and concerns rising about a potential bubble in artificial intelligence (AI), there are multiple reasons as to why investors may not be feeling as bullish about Broadcom these days. Is this just a temporary setback for the AI stock, and could now be a good time to invest in Broadcom, or is it really in trouble and likely heading even lower?
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Broadcom's latest earnings results haven't helped the stock
The turning point for Broadcom's stock appeared to take place in early June, when the tech company released its quarterly numbers. While Broadcom's sales were up an impressive 48% year over year and totaled just under $22.2 billion, they were still short of analyst projections. Investors were also troubled that it didn't raise its guidance. For a stock that's trading at a high valuation, investors expect to see beat-and-raise quarters. Broadcom didn't deliver a full beat, and it didn't raise its guidance.
Earlier this month, it posted its most recent earnings numbers, and while it did beat on both the top and bottom lines this time around, it was once again the guidance that didn't appear to win over investors, coming just short of analyst projections. Meanwhile, a closer relationship with OpenAI, about which investors have grown increasingly concerned amid questions about the chatbot maker's ability to turn a profit, may also be weighing on Broadcom, as it could add risk down the road.
The stock looks cheap, but it isn't without risks
Due to its declining share price, Broadcom's stock is looking much more attractive, as its valuation is much more reasonable. It's currently trading at just 19 times its expected future earnings (based on analyst expectations). That's lower than the S&P 500 average of 20.
While Broadcom's stock may not exactly be a dirt cheap bargain, and it may still go lower, it could make for a much more tenable investment now than earlier in the year, when it was trading at a far higher premium. With the business experiencing tremendous growth due to AI, the stock could be worth buying right now as demand for custom chips is likely to remain strong for the foreseeable future.
The big problem with Broadcom's stock was its inflated valuation. But now, with it trading at more reasonable levels, investors may want to consider buying it for the long haul.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Broadcom. The Motley Fool has a disclosure policy.
