Why Broadcom Stock Dipped Into the red Today
Key Points
He's now lukewarm on its prospects with his new hold rating.
Meanwhile, AI developer DeepSeek is reportedly working on a proprietary AI chip.
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An analyst's recommendation downgrade didn't do any favors for Broadcom (NASDAQ: AVGO) stock on Tuesday. That, plus the latest news of a company developing a proprietary artificial intelligence (AI) chip, pushed Broadcom's equity down by almost 1% that trading session.
Tapping the brakes on Broadcom
The downgrading party was Austrian bank Erste Group. That morning, its analyst Hans Engel moved his Broadcom recommendation down one peg to hold from buy. It was unclear what price target the pundit set.
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While Engel waxed bullish on the company's prospects as a developer and maker of next-generation custom AI chips, according to reports, he expressed concern about its valuations.
These are somewhat immodest at the moment, with, for example, a price/sales ratio over 23. Engel wrote that given such multiples, the stock's upside could be limited even if it posts impressive growth like it has in the past.
Broadcom's stock was also affected by a Reuters report stating that DeepSeek, a high-profile AI developer based in China, had launched a project to make its own AI chip. This is part of a recent trend of companies independently developing such goods, in an attempt to reduce dependence on third-party "chippies" like Broadcom.
The potential proprietary threat
Of the two developments, I'd keep a sharper eye on that proprietary chip development trend. If it really snowballs in the coming months and years, Broadcom and its peers could face a serious challenge. As it is now, though, the thirst for quality AI hardware is unquenchable, and simply by virtue of this, Broadcom should continue to do well. I remain bullish on the company's future.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Broadcom. The Motley Fool has a disclosure policy.
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