I Can't Stay Quiet on Broadcom Any Longer

Hey, welcome back subscribers to my Wall Street Stocks. My name is Ali, of course. And hey, you know, I've been getting asked a lot about Broadcom right now. Not only because I am a shareholder myself, but more importantly, they just reported earnings this week that really seem to be scaring investors into pushing that sell button on the stock. Where it not only lost over 5% this week and was down even more earlier in the day, but it's also lost about 30% of its value from the very top, too. So, what's driving this kind of a broader sell-off here in the stock? What were those earnings truly as bad as Wall Street is perhaps making it out to be? Could this be a classic value trap waiting to ensnare greedy investors? Or is this just another great buy the dip opportunity for an AI beast that is firing on all cylinders? Well, let's dig into the numbers here to see if we can get some clarity on this stock. Now, spoiler alert, I am much more on the latter side of that argument on the bullish side. Uh but to understand why Wall Street may be overreacting here to Broadcom's business performance, well, you first have to know what they actually do and why they carry such a strong secular moat that may be worth investing in in the first place. Uh see, while it's true that Nvidia is probably the most dominant AI chips company in the world right now, really, uh which commands so much attention, well, their focus is actually more on selling massive amounts of these general purpose GPUs to anyone that needs them, and of course, to businesses, you know, worldwide. But Broadcom operates a little differently. See, they act as more of kind of a I guess kind of a king in their own rights, but when it comes to custom ASICs, or what are called application-specific integrated circuits, ASICs. Uh see, when you look at the biggest tech giants in the world like Google, Meta, OpenAI, and more, well, they tend to have specific highly specialized AI workloads. And because of it rather than you know just relying too heavily on off-the-shelf hardware that can get very expensive and power hungry at scale, well they sometimes go to Broadcom instead and say, "Hey, help us design our own custom-built AI accelerators." To which Broadcom then might co-design the chips, handle much of the complex packaging, and provide even foundry access actually build it all too. One reason why this type of business carries such a strong moat is that once these tech giants start building their multi-billion-dollar data centers around these custom Broadcom chips, well the switching cost can be you know very expensive and and difficult for them. And you wouldn't want to just you know go out there and rip out all of your custom infrastructure overnight that you spent so long building up for some other option that you're of course going to be much less familiar with too, by the way. Now that's not to say that Broadcom isn't diversified into many other areas too. For example, they're a monster when it comes to AI networking solving a major bottleneck for AI communication speeds, and they even have a giant recurring revenue enterprise software division that is anchored by VMware they acquired that pulled in close to nine billion dollars 8.8 billion to be specific um this past quarter alone. But it's this overall package that makes Broadcom such a compelling hold I would say long-term. Well, that incredible moat is translating also to just as incredible of financial results on the top and bottom line. And this latest quarter despite causing the stock to dip was actually I would say another blowout quarter for them, blowout report that in my opinion should have actually sent stock rising even more, definitely not falling. On the top line sales of nearly 30 billion dollars was a gigantic 86% increase year-over-year. That's insane growth for that already huge size. And even better, adjusted operating income came in above $20 billion, too, which was a massive 92% growth year over year. And even free cash flow came in at 13.7 billion, which is around 46% of their total sales. I mean, this is a company that is just absolutely crushing it right now. And in fact, the most important metric of all, what everyone is really paying the most attention to, is in their AI semiconductor revenue. Well, that segment alone pulled in 16.7 billion during the quarter. And if you think that's impressive, it was gigantic growth for that size of more than 220% year over year. And custom accelerator shipments, what we just talked about earlier for being, you know, such a game changer for Broadcom, well, it grew more than three and a half times compared to last year, making up 73% of that AI revenue. In other words, they're scaling up much faster than almost anyone ever even really anticipated. Especially like, you know, a few years ago. I mean, that's when I was really buying heavy myself into this stock. And I remember getting, you know, some criticism for it. But now you see what this company is doing right now and how that's driven all of the big share gains in recent years. And yeah, you know, I'm I'm feeling pretty good about my decision my decision to buy in at those much lower levels, you know, years ago and now being able to reap the rewards and still, you know, still look forward to so much more to come in the future. But if if all the news has been, you know, so good and so impressive around Broadcom, then why on earth is the stock actually going down in price, at least right now here in these past few months and even after these blowout results? Well, it all comes down to Wall Street's obsession with forward guidance. Well, Broadcom basically told the market that they expect their next quarter revenue to come in right around 34.8 billion. The problem with that is that analysts had modeled about 35 billion instead. In other words, we're talking about a miss here of, you know, just roughly around $200 million on a $35 billion base. I mean, guys, that's less than like a 1% miss. Now, in any other time, a company this on fire with incredible growth on already gigantic size would have no problem with such a tiny little difference here on guidance that could even just be like, you know, Broadcom perhaps lowballing expectations just so they can beat them, you know, more easily when they report actual results results later on. But because AI stocks including Broadcom have been on such a tear in recent years, almost of them are now being put under, you know, a big microscope at the moment, especially with all the capex spending, even with the rising input costs like memory, which in the case of Broadcom, yeah, they're not going to be immune to any of that either. In fact, they actually guided for a slight dip in margins because of all the high-bandwidth memory that they need for the for these custom AI chips that they make that are, you know, of course becoming just, you know, more and more expensive, uh seemingly by the day at this point. I'm talking about memory. Um but in my opinion, all of this is being I would say a bit, you know, blown out of proportion. Uh Broadcom's margins are still looking fantastic to me, and with all the rising demand, I'd rather them spend more of their cash uh to be able to fill their orders so to keep supply up than to just, you know, stop producing things so that Wall Street doesn't get scared about a tiny dip in margins. I'd rather them go all in on on what's driving so much success for them. And during the um earnings call, in fact, uh CEO Hock Tan, uh he dropped a a $230 billion bombshell, I would say, on the market where uh rather than just giving guidance for the next 3 months, they actually opened up their playbook for the next 4 years, stating that they expect their AI semiconductor revenue to hit $115 billion by fiscal 2027. And then they expect it to double again to 230 billion by fiscal 2028 with EPS on track to hit $30 per share by the same year, too. I mean, if they achieve that, that would be like astronomical numbers that we're talking about here. I mean, you'd be sitting at uh maybe a forward price to earnings ratio P ratio of like around 10, maybe. You know, maybe a little more than that, but you know, somewhere in that ballpark. And that is just insanely cheap for a company like this. It's it's way too too low for where the stock is sitting today and how insanely good the business is performing. And in fact, that's why also their PEG ratio which, you know, factors in future growth. And mind you, this is with old projections, not not these new higher ones, but even with the old ones, their PEG was um sitting at only less than 0.7. I mean, that's less than half their average of the past 5 years. So, in other words, investors would normally accept more than double the current valuation, but you're talking about, you know, half of that. And because of all that incredible growth, it's now um also sitting 40% lower than the sector median, too. I mean, what world do you get such an on-fire business like this that is leading the market in several different ways, but you actually get it for a 43% discount to the sector, to competition. That's pretty attractive. And again, it's all coming from mostly their advancements in custom AI chips. Anthropic, for example, is set to deploy 5 GW of Broadcom's next-gen TPU chips by 2027 and another 10 GW by 2028. Open AI is looking at a 1.3 GW deployment of their custom jalapeno chips by 2027 and over 5 GW by 2028. And Google is slated to buy tens of billions of dollars worth of custom processors every single year for for, you know, the upcoming foreseeable future here. And even meta is partnering with Broadcom to ramp up production of their own custom AI accelerators that are specifically built to power giant recommendation engines, basically act like the hidden algorithms behind your social media feeds like you know, for deciding what videos and ads will get served to you next. And there's several more important partnerships like this too, but already management claims that they've secured the supply chain, the wafers, the the substrates, the the memory to actually meet all of this massive demand, you know, in the coming years particularly in 2027 and 2028 when they're predicting that things are just going to go off the charts. And they're even deploying a substrate facility in Singapore next year too to help ease some of the supply bottlenecks further as well. In other words, they've got the backlog, they've got the long-term contracts locked in and all they really need now is just to simply execute and convert all of this into real world revenue, which I would argue that at least so far they've been doing a great job of and I don't see any reason to doubt them, at least not you know, not so far. I've been very very impressed with everything that they've been putting out. I understand the whole fear around the AI bubble bursting or that, you know, if there is any kind of bump in capex cycles or if any execution hiccups arise that it could trigger a major correction, but in my opinion this would probably be felt market wide anyway and overall I just haven't seen enough credible evidence to believe that Broadcom specifically would fail to execute here. There's always the risk of macro headwinds hurting these type of stocks, you know, that's it kind of goes without saying. But again, you just look at it company specific wise, I'm very impressed with Broadcom's performance and they haven't really given me a reason to doubt them, at least not yet. So I plan to continue holding my shares long-term even though again, I am already up a huge amount on my position, but it's still a stock that I think can run even higher over the next 5 to 10 years. But hey, what do you guys think? Is this a stock that you're buying right now on the dip or is there just too much risk involved with AI stocks like this across the market? I'd love to hear your thoughts down below. Uh thanks again for stopping by my friends. I hope you enjoyed this quick update on Broadcom. Let me know if there's any other stocks that you'd like an update on as well. I'd love to make those videos for you. Um and if you'd like to support the channel, hey, you can head over to our Patreon. You can become a member. 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