Why Broadcom Stock Fell 15% in June
Key Points
Broadcom delivered solid results in its second quarter, but investors wanted more.
On Wednesday, Broadcom signed a $30 billion deal with Apple.
After an earlier surge, the stock now looks attractive, trading at a forward P/E of 33.
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Shares of Broadcom (NASDAQ: AVGO) were among the losers last month, tumbling after its second-quarter earnings at the beginning of June despite solid results.
The company's AI revenue, while strong, fell short of estimates, and management acknowledged that Google, a major customer, was diversifying its sourcing for custom chips, or ASICs.
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As a result, the stock finished the month down 15%, according to S&P Global Market Intelligence.
As you can see from the chart below, the stock fell sharply after the report and then stayed down.
AVGO data by YCharts
What happened with Broadcom
Broadcom has been one of the biggest winners in the AI boom, and it may be the least-known trillion-dollar company in the country, with a valuation of nearly $2 trillion.
However, concerns about stretched valuations and overspending on AI infrastructure are starting to weigh on semiconductor stocks like Broadcom, and that was evident following its earnings report.
In the second quarter, Broadcom's revenue grew 48% to $22.2 billion, and adjusted earnings per share increased from $1.58 to $2.44. Both results slightly beat expectations.
Broadcom also said that semiconductor revenue from AI grew 143% to $10.8 billion, which was better than the company's forecast. It also said that AI-related revenue would triple in the third quarter to $16 billion, but that was slightly below expectations of around $17 billion.
Investors also seemed disappointed that the company didn't raise its long-term AI chip guidance as it continued to call for at least $100 billion in sales in fiscal 2027.
What's next for Broadcom
Looking ahead to the third quarter, Broadcom expects around $29.4 billion in revenue, representing 84% growth from the quarter a year ago, and it forecast $19.6 billion in adjusted operating income.
The business is clearly executing effectively, but the stock surged so much in recent years that high expectations have been baked into the stock, though it now looks reasonable at a forward P/E of 33.5. Considering its growth rate, that seems like a fair price to pay, but the market may need to see more evidence that its growth is sustainable.
Broadcom seemed to deliver just that on Wednesday, it signed a $30 billion deal to make chips for Apple. The partnership will include a $1.5 billion investment from Apple to help Broadcom expand a Colorado manufacturing facility. Broadcom rose 5% on the news.
Last month's pullback seems to offer a buying opportunity for Broadcom now, given the overall strength of the business. For AI investors, Broadcom's diversification makes it virtually a must-own stock.
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Jeremy Bowman has positions in Broadcom. The Motley Fool has positions in and recommends Apple and Broadcom. The Motley Fool has a disclosure policy.
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