Bull v. Bear: AVGO Sees New Pressure in MRVL & GOOGL Deal

Fast market here on Schwab Network, shares of Broadcom are attempting a bit of a recovery today after taking a hit on Wednesday. The stock fell more than 4% after Marvell expanded its partnership with Google on custom AI chips, raising concerns that Google is diversifying away from Broadcom for its GPU business. But Broadcom isn't being pushed out. Its Google partnership runs through 2031. It also works with met on custom AI chips, according to Market Watch, Bernstein says the bigger story may be the sheer size of AI demand, with enough business to go around in a market that remains compute constrained. To that end, shares of Broadcom are up about 25% on a year over year basis, as some investors still believe in the bull case. All right time now for the tug of war on Broadcom. For that. Let's welcome back in our co-host Kevin Hincks and Joe Mazzola. It is bull versus bear time. Before we get to your example trades. We got to get each of your thoughts on Broadcom. Kevin I'll start with you. Your take yesterday's news story on Broadcom and Marvell. And Google favored Marvell. And Marvell was up. Broadcom down yesterday. That being said you mentioned they still have a deal with Google. They still have a deal with meta. They still have a deal with open AI. I don't think the demand is going anywhere. I think I think firms like Google Alphabet are trying to diversify so they don't get caught without enough, without enough product. So I think behind the scenes here, there's a a draft, a dramatic search for enough product. And I think that's was what the market missed yesterday because I get why you would buy Marvell on this. But I don't know necessarily that you should have sold off Broadcom as much as you did. Remember they've got earnings coming up September 2nd. They're a bit late in the overall cycle. And that's going to be real interesting because has anyone anywhere shown any drop off or deceleration in any demand. Remember we're now what six days away from Nvidia's earnings. That's going to be the first big day. Then September 2nd is Broadcom's earnings. I don't think you should read anything into this as the market reacted to a story. I don't think it changes anything in the big picture Diane. So not a zero sum game is my take from what you're saying. Saying Joe what's your take on Broadcom. I agree with Kevin 100%. I think if if you look at the demand that we see going forward, there's going to be a lot of one A's one B's and one C's. And I think Broadcom probably still falls within that realm. I was looking at the charts on this thing. It's really interesting when we put in kind of that near-term bottom you know second third week with the semiconductor stocks and the memory stocks as they started to catch a recovery, we are literally at the exact same level that we were back then in July, where we are today. Even though you've seen a lot of the competitors of Broadcom outperform the stock. And it did rally for a bit before kind of pulling back. So we kind of had a bit of an intersection here an inflection point if you will. I think we're right around that. 360 level. Yeah. 363 and that's basically the low that we put in, in, in July. So it'll be interesting to kind of see if the stock picks up a little support as we head into earnings. You know, the Nvidia earnings are going to play a little bit of a part in that as well. But you know overall analysts are expecting earnings per share of around 324 on revenues of about 29.5 billion. That's an increase of 85% year over year on that on that revenue forecast. So you know how much of that's already priced in. We'll see. But if you're looking at it from a valuation standpoint, trading about 30 times forward PE, there's a lot of other stocks that don't have that same type of growth potential that are trading along those levels and a Peg ratio of around one. So if you look at, you know, the price earnings divided by the estimated growth for the next 3 to 5 years, that's putting it around one, which means it's probably, you know, falling in some of the more to undervalued range there. So, you know, for value investors, they might start to look at the stock as we head into earnings. Okay. All right. Let's get into example trades. Kevin let's start out with yours. What's your approach. So mine is in the passive to bearish frame. I looked at something above the market selling going up. Remember I said they have the September 2nd earnings event. So I went to the August 31st expiration. I looked at the expected move. I sold the 385395 call vertical. I collected about $1.40. It's trading maybe a dime lower than that now, but this is a 80% probability of finishing out of the money. So short term, if you wanted to hedge some a long position and do something where you could, the stock can still rally and you can still be profitable. This is a high probability short call vertical collecting theta. And of course as always risk defined. Joe. When I look at something like this, that's all I want to do. If I'm thinking neutral to bearish, I don't want to overcommit right here. I want to give this stock some room to recover ahead of not only Nvidia's earnings next next week, but then their own earnings on September 2nd saying of course ahead of that event. Yeah. No I think anytime you're selling that type of premium heading into an event and you're able to keep it outside of that event, you know, you got to think about what is the catalyst that can move the stock to, to put this call vertical at risk. And, you know, it's, it's this is going to expire prior to Broadcom's earnings. So you don't have to worry about that. And right now we're not showing a lot of strength in the semiconductors as a whole. As a matter of fact, I've had a rough week or two. So you know this is a stock that in my opinion has probably been a little bit over punished. But, you know, if you're if you're thinking about what can push this stock into to create an issue for this spread, I don't see a lot of catalysts prior to earnings. Approach. So what's your approach with your example, Trey. So I actually went into the earnings cycle for this one. And it really is kind of a make or break. It's it's a way to capitalize on a couple of things that I'm seeing right now. And that is, you know, we talked about it already, Diane, the idea that, you know, we could be forming some support here around that 360 level, which we've, we've bounced off that level twice now, and we're right at that 200 day moving average. There's a few there's a few things from a charting perspective that are kind of setting up on this trade. The other thing I looked at is the call skew. So what are investors paying right now for upside calls relative to maybe what they've done in the last 30 to 90 days, and they're starting to pay up again for that. So you're starting to see a lot of people are betting for an upside move on this stock. And you can actually take advantage of that when you're an option trader by doing something like this. And this is a broken wing butterfly where I'm buying this is the September 4th expiration. So I'm buying the 360 strike. I'm selling two of the 390 strikes and then buying the 410 strike. So I've got a $30 wide long vertical that I'm reducing the cost of that by selling a $20 wide short vertical. This is going to expand to its highest value at 390, which is fairly close to maybe where that expected move is for the September 4th expiration, maybe a little bit inside of that. But it gives you the ability, if you're paying about $8 for this thing, it gives you the ability for almost a triple. Should we get up there? The other thing that is important when you're considering kind of that call skew is I'm able to sell two of those 390 calls for probably a higher level than I normally would, considering that there's a bid to this upside. So I'm trying to take advantage of this. And if this move occurs and I'm right as it gets close to that 390 to 395 level, a couple of things are going to happen. Those calls that are that are in the money, those three 60s that I bought there, you know, those deltas are going to increase as we go up, and you're going to see a lot of that implied volatility come out of those 390 strikes. And since I'm short two of those that that helps this. Now you could you know, you can do this as a one by two ratio, but I actually bought the 410 leg to keep it risk defined. That way. If this thing blows up and rips up to the upside, I know that I can still make some money. Yeah. Joe, I see your your trade. You're taking advantage of a $30 call vertical and then selling a $20 call vertical. You're targeting that 390 strike. You've got a little bit of a of a debit here, $7.90. So it's not cheap. But like you said, if it goes to, to, to 390, you've got a nice at least a triple on your hands here. And directionally it does what we do a lot on this show, which is it's a butterfly, but it doesn't hurt you if it goes through your strike and past, you won't peak out on earnings, but you'll stay profitable, which is some of the biggest problems with a butterfly spread. It looks like a great idea, but if it blows through that strike, you lose all your profitability. This one keeps a fair amount of it. All right. Those are the example