Why Broadcom Stock Ticked Higher on Tuesday

Unlike many other tech stocks, Broadcom (NASDAQ: AVGO) landed in positive territory on the second trading day of the week. It closed the trading session more than 1% higher, thanks to capital flight from software titles to hardware makers, and to a bullish analyst update.

The IBM Effect

Tech investors were cycling out of legacy software companies following International Business Machines' release of its preliminary second-quarter results. These indicate that both the company's revenue and net profit, not under generally accepted accounting principles (GAAP), will come in well under analyst consensus estimates.

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The company's CEO Arvind Krishna attributed this to a broad adjustment in capital spending by clients during the period. He said they were favoring storage and memory solutions, as well as servers, over software. In his view, this trend is due to anticipated price increases in such goods.

In turn, that's being driven by supply constraints related to the massive build-out of artificial intelligence (AI) technology. Broadcom is a high-profile developer and supplier of custom AI chips and AI networking silicon.

Keep buying, says analyst

That was bolstered by a new note from Morgan Stanley analyst Joseph Moore. This analysis focused on the potential threat posed by fellow chipmaker MediaTek to Broadcom's business as a component supplier for Alphabet's tensor processing units (TPUs; specialized AI chips from that company's Google subsidiary).

According to reports, in concluding that MediaTek isn't a serious, disruptive threat to Broadcom's Google TPU business, he reiterated his overweight (read: buy) recommendation on Broadcom. Moore is particularly heartened by what he sees as Broadcom's ability to win new business for its custom AI chips, which should reduce any dependence on the Google partnership.

I continue to think of Broadcom as a company on the front lines of the AI revolution. And while that hardware spending might be front-loaded to beat upcoming price hikes, demand for the components that power AI -- like Broadcom's chips and components -- will remain strong. To me, the stock's price bump on Tuesday was too modest, if anything.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Broadcom, and International Business Machines. The Motley Fool has a disclosure policy.