Why Broadcom Stock Rallied Tuesday Morning
Key Points
Broadcom stock rallied following reports that Intel will raise prices.
This gives other AI chipmakers cover to hike prices as well.
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Shares of Broadcom (NASDAQ: AVGO) climbed on Tuesday, gaining as much as 4.1%. As of 2:46 p.m. ET, the stock was still up 3.1%.
The catalyst that sent the semiconductor specialist higher was a report that Intel plans to raise prices for its CPUs.
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AI adoption continues
A report surfaced on Tuesday suggesting that Intel plans to raise prices later this year in a bid to boost its gross profit margin. The company plans to hike the cost of its CPUs by 10% this fall, according to a report by DigiTimes.
If true, this would mark the third round of price hikes by Intel this year, after increases in Q1 and in July.
Just last month, Nvidia reportedly notified customers of plans to raise prices by more than 15% to offset rising memory chip costs, according to a report that first appeared in Bloomberg. The increases are scheduled to take place on chips and systems shipped early next year. This will include the company's Grace Blackwell and Vera Rubin chips and will largely depend on the generation of the chips and memory configurations, according to the report.
So what does this have to do with Broadcom?
The spiraling cost of high-speed memory chips has been well documented, and the impact is being felt across the artificial intelligence (AI) landscape. Many of the biggest tech players have cited the spike in memory chip prices, which are weighing on margins and pinching profits.
With major players like Intel and Nvidia announcing price increases, Broadcom has the cover to do the same. Investors have been watching closely to see whether chipmakers can maintain their juicy gross profit margins, and with memory prices on the rise, doing so hinges on raising prices.
Broadcom stock is currently selling for 32 times forward earnings and 19 times next year's expected earnings. While that might seem pricy, I'd argue it's a reasonable price to pay for a company that just increased its year-over-year revenue by 86% and AI-related revenue by 221%.
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Danny Vena, CPA has positions in Broadcom and Nvidia. The Motley Fool has positions in and recommends Broadcom, Intel, and Nvidia. The Motley Fool has a disclosure policy.
