Why Broadcom Stock Took a Dive Today
Key Points
Broadcom stock declined after OpenAI revealed that its annualized revenue was lower than had been reported.
This stoked fears about circular financing deals and about OpenAI purchasing fewer of Broadcom's custom AI accelerators.
This appears to be nothing more than an accounting disclosure.
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Shares of Broadcom (NASDAQ:AVGO) turned lower on Thursday, falling as much as 5.1%. The stock was still down 4.4% by the time the market closed.
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The catalyst that sent the semiconductor and networking specialist lower was news that OpenAI's revenue was substantially lower than had been previously reported.
Image source: The Motley Fool.
Accounting disclosure
Artificial intelligence (AI) start-up OpenAI revealed that its annualized revenue was roughly $50 billion as of the end of September, significantly lower than the $68 billion that had been widely reported by the financial media late last month.
In an updated presentation shown to potential investors, OpenAI clarified the figure, noting that the $68 billion included gross revenue from the company's partners and was meant to provide an apples-to-apples comparison to its most direct competitor, start-up Anthropic.
So what does this have to do with Broadcom?
Many AI stocks tend to move together, so the news alone may have been enough to send Broadcom lower. However, the company has a more direct connection to OpenAI. Reports emerged yesterday that Broadcom was working to line up roughly $50 billion in financing for OpenAI to fund the purchase of AI-centric chips.
Broadcom and OpenAI have been collaborating on a custom AI processor, dubbed "Jalapeno," which is expected to be deployed later this year. Given the close ties between the two, it makes sense that the company would help OpenAI arrange financing to buy Broadcom's custom chips.
Taking a step back, if OpenAI's revenue isn't all it was cracked up to be, it may have fewer resources and less need for Broadcom's chips. Add in fears about circular financing deals in the space, and it's easy to see why investors might be nervous, though this appears to be nothing more than an accounting disclosure.
At 31 times forward earnings and 18 times next year's expected earnings, Broadcom is attractively priced relative to the size of the opportunity. Moves like this provide astute investors with the opportunity to pick up shares at a discount.
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Danny Vena, CPA has positions in Broadcom. The Motley Fool has positions in and recommends Broadcom. The Motley Fool has a disclosure policy.
