TL;DR:
- The allure of “artificial intelligence” in the stock market faces a shift in sentiment.
- Broadcom Inc.’s upcoming earnings report will determine the fading euphoria around AI.
- Investors are becoming more selective as the tech rally slows down this month.
- Reactions to recent earnings from tech companies with AI exposure, like Nvidia and Marvell, have raised concerns.
- Market fatigue around the AI trade, uncertainties about the market and the Fed, impact investor decisions.
- Broadcom’s stock showed a significant gain in 2023, but the AI sector’s outlook is being reevaluated.
- Broadcom’s post-earnings performance will provide insights into the sector’s future direction.
- Ongoing challenges include Federal Reserve signals, recession worries, and elevated multiples.
- The market is still interested in AI, but cautious about quick growth extrapolations.
- Analysts anticipate revenue and net earnings growth for Broadcom’s upcoming report.
- Broadcom’s favorable valuation and progress in acquisitions set it apart in the market.
- The outcome could signal the market’s perception of AI’s sustainability and growth prospects.
Main AI News:
In the year 2023, the allure of “artificial intelligence” that led to stock market prosperity is confronting a shift in sentiment. The upcoming earnings report from Broadcom Inc. is poised to determine whether the once-prevailing euphoria surrounding AI is now waning.
This month’s sluggishness in the tech rally has indicated that investors are becoming more discerning. Despite Nvidia Corp.’s results surpassing lofty expectations, its shares exhibited a tepid initial response. Similarly, Marvell Technology Inc., another chipmaker with AI exposure, experienced a slump following its own earnings announcement. These reactions raise concerns for the market, especially for companies heavily reliant on AI sales for a boost.
Mizuho Securities’ tech-sector specialist, Jordan Klein, noted, “Investors are exhibiting some fatigue with the AI trade, displaying nervousness about the market. Given the uncertainty surrounding the Federal Reserve, there’s a diminished incentive to make purchases.” The market’s response to Broadcom’s outlook is anticipated to provide valuable insights into the sector’s trajectory.
On Thursday, Broadcom’s shares surged by up to 3.2%, edging closer to a record high. Notably, the company had stated in the previous quarter that AI-related sales would double this year. Its stock’s remarkable 61% growth in 2023 has outperformed both the Philadelphia semiconductor index and the Nasdaq 100.
Previously, achieving such a forecast would have propelled the chipmaker’s shares to soaring heights. However, following Nvidia’s underwhelming market reaction, Broadcom’s impressive streak of post-earnings day surges spanning ten quarters might now be in jeopardy. The options market projects a one-day movement of 4.4% in either direction on the day following the earnings report.
Challenges persist, including the Federal Reserve’s indication of prolonged higher interest rates, looming recession concerns, and elevated multiples following a robust year-to-date surge. A basket of stocks identified by Goldman Sachs Group Inc. as those likely to benefit significantly from artificial intelligence has retreated from its peak at the beginning of the month.
Kevin Caron, Senior Portfolio Manager at Washington Crossing Advisors, remarked, “While the market is captivated by AI, there’s a recognition of the rapid run-up that has occurred. Tech investors have a history of extrapolating growth too hastily. The AI trend will unfold over several years, prompting an evaluation of companies experiencing genuine growth and profitability. This assessment takes into account valuations and rate policies.”
As Broadcom prepares to release its earnings report later on Thursday, analysts project a 4.8% increase in revenue accompanied by net earnings growth of nearly 14%, as per data compiled by Bloomberg. This consensus has remained steadfast over the past month, even as Nvidia’s report solidified the persistent demand for chips used in AI services.
One favorable aspect for Broadcom is its valuation, trading at 20 times estimated earnings. While this represents a premium compared to its long-term average, it still falls well below Nvidia’s 36 and Marvell’s nearly 29. Moreover, it’s priced at a discount compared to both the broader semiconductor index and the Nasdaq 100. The company also boasts one of the higher dividend yields among chipmakers.
Progress is also evident in Broadcom’s $61 billion acquisition of VMware Inc., set to conclude around the end of October. Mizuho’s Klein commented, “Broadcom stands as a diversified entity with a compelling AI business, strong cash flow, and an appealing valuation. This positions it as a viable buy-and-hold stock rather than a momentum-driven investment.”
Klein further added, “Nevertheless, Broadcom’s guidance might not be as aggressive as Nvidia’s. There’s a prevailing sentiment that if Nvidia couldn’t rally based on its forecast, the odds may be similarly challenging for other companies.”
Conclusion:
The market’s shifting sentiments towards AI, exemplified by Broadcom’s impending earnings report, reflect a growing discernment among investors. While the allure of AI persists, the industry is transitioning from unchecked euphoria to a more measured evaluation of growth prospects and profitability. As companies like Broadcom grapple with maintaining investor confidence, the market is learning to balance optimism with a more pragmatic perspective on the future of AI-driven enterprises.
