Broadcom’s earnings will test whether the artificial intelligence euphoria fades

(Bloomberg) — After making stock market fortunes in 2023, the “artificial intelligence” slogan is facing a shift in sentiment — and Broadcom Inc.’s earnings will be tested. Whether orgasm fades away.

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There are signs that investors are becoming more selective as the tech rally stalls this month. Nvidia Corp. shares had a tepid initial reaction to results that beat lofty expectations, while Marvell Technology Inc. fell. — another AI-powered chip maker — after its own report. These reactions are worrying for the market, especially for companies that rely on AI sales.

“There is some fatigue around AI trading, investors are concerned about the market, and there is less incentive to buy given the uncertainty surrounding the Fed,” said Jordan Klein, a technology sector specialist at Mizuho Securities. He said investor reaction to the Broadcom outlook will be an important read for the sector.

Broadcom shares rose as much as 3.2% Thursday, within striking distance of a record high.

Broadcom said last quarter that AI-related sales would double this year, and the stock’s 61% gain in 2023 beat both the Philadelphia Semiconductor Index and the Nasdaq 100.

Achieving these expectations would likely send the chipmaker’s shares up two weeks ago. Now, with Nvidia’s performance declining relatively steadily, Broadcom’s 10-quarter streak of rallying the day after earnings could be in jeopardy. The options market indicates a one-day move of 4.4% in either direction the day after the report.

Read more: Broadcom AI offerings boost results amid slowing sales: A preview

And the headwinds were continuing. The Fed has signaled that interest rates will remain higher for longer than expected, recession fears remain, and multiples look high after strong year-to-date progress. The basket of stocks tracked by Goldman Sachs Group Inc. Which is expected to benefit more from artificial intelligence than the peak it reached at the beginning of the month.

“The market is fascinated by AI, but people are very aware of the lead up to it, and there is a history of technology investors chasing growth very quickly,” said Kevin Karon, senior portfolio manager at Washington Crossing Advisors. “The AI ​​business will continue for years, but we are now evaluating who actually sees better growth and profitability, and how attractive it is given valuations and pricing policy.”

When Broadcom reports later Thursday, analysts expect revenue growth of 4.8% on net earnings growth of roughly 14%, according to data compiled by Bloomberg. That consensus hasn’t budged over the past month, even as Nvidia’s report confirms continued huge demand for chips used to process AI services.

Read more: Nvidia partner expects AI server sales to double in 2024

One mark in Broadcom’s favor is its rating. The stock trades at 20 times estimated earnings, and while that represents a premium to its long-term average, it’s much lower than Nvidia at 36 or Marvell at roughly 29. It also trades at a discount to both the General Semiconductor Index and the Nasdaq 100 Index, while offering one of the highest dividend yields among chipmakers.

Moreover, there was also progress in the company’s acquisition of VMware Inc. at $61 billion, which Broadcom expects to close near the end of October.

“Broadcom is highly diversified with an attractive AI business, has good cash flow, and the valuation is more attractive, making it a good stock to buy and hold rather than play with momentum,” Mizuho’s Klein said.

“However, it will not steer as aggressively as Nvidia, and there is a feeling that if Nvidia cannot live up to its expectations, what chance does any other company have.”

Technical chart for the day

Apple stock rose 1.9% on Wednesday, a rally that brought the iPhone maker back above its 50-day moving average, a positive sign of momentum trends in the short term. The stock fell below that closely watched level earlier this month.

Top technology stories

  • Apple is testing using 3D printers to produce the steel case used by some of its upcoming smartwatches, according to people familiar with the matter, heralding a major change in how the company manufactures products.

  • X, the social network that was formerly known as Twitter, has updated its privacy policy to include a new type of user data that it plans to collect: biometrics.

  • China has approved its first batch of generative AI services to go public, freeing up leading domestic technology companies including Baidu Inc. and SenseTime Group Inc. To openly compete with the likes of OpenAI Inc. and Microsoft Corp.

  • Tesla’s plan to buy hard-to-get building materials is being investigated by US attorneys general who are looking into whether the project represents an appropriate use of the company’s funds.

  • Chinese state media has jumped aboard a wave of patriotic pride surrounding Huawei Technologies’ latest smartphone, portraying the gadget as a technological marvel that delivered a much-needed victory over US sanctions.

  • Japan’s economy ministry is seeking a budget of more than 120 billion yen ($822 million) to boost the country’s semiconductor sector next year, as the country places chips at the center of economic security policy.

Earnings are due Thursday

  • before being put on the market

  • aftermarket

    • Broadcom

    • VMware

    • Dell Technologies

    • MongoDB

    • Nutanix

    • Flex

– With the assistance of Subrat Patnaik and Riya Rao.

(Stock updates in the fourth paragraph.)

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