Broadcom Inc. has experienced a significant surge in its stock market performance this year, fueled by the widespread enthusiasm surrounding artificial intelligence. As the company prepares to release its quarterly earnings on Thursday after the market close, a critical question looms over the chipmaker: Has its current performance reached its peak?
Peter Sorrentino, who manages the global growth equity strategy at Huntington National Bank, shared his firm's perspective. His firm holds Broadcom shares but is not currently increasing its position. Sorrentino expressed a degree of caution, stating, "Our fear is that it’s kind of primed for disappointment."
The stock's performance metrics are striking. Since reaching its lowest point on April 4, the stock has appreciated by over 180%, positioning it as the tenth-best performer in the S&P 500 Index during that timeframe. Furthermore, it has seen an additional 35% increase solely since the September earnings report, with Wednesday marking a record closing price.
Valuation Concerns Amidst Strong Performance
Despite its impressive climb, Broadcom's stock has entered a valuation territory that many consider expensive. The company is currently trading at approximately 42 times its forward earnings. This valuation stands in stark contrast to its 10-year average of just 17 times forward earnings. Among the group of major technology companies known as the "Magnificent Seven," only Tesla Inc. exhibits a higher valuation multiple.
Sorrentino articulated this concern, telling Bloomberg, "We’ve got investors out a little over their skis here." He noted that his team has maintained their existing Broadcom position without adjustments throughout the recent price run over the past six months.
Analysts Project Strong Quarter Driven by AI Demand
Financial analysts are anticipating a robust performance for the fiscal fourth quarter, which concluded on October 31. Projections indicate adjusted earnings per share of $1.87, an increase from $1.42 in the same period last year. Revenue is expected to reach approximately $17.5 billion, up from $14.1 billion a year prior. The artificial intelligence segment alone is projected to contribute around $6.2 billion, representing a substantial increase of approximately 68%.
Shaon Baqui, who follows tech stocks at Janus Henderson Investors, highlighted the company's strong position. His firm holds Broadcom in multiple portfolios. Baqui commented, "Expectations here are obviously elevated given the recent performance, but for good reason. They’re significantly levered to the Google ecosystem, and we all see the recent success around Gemini 3 and what Google’s been able to do."
Beyond the financial figures, the commentary from Chief Executive Officer Hock Tan during the earnings call is of significant interest to investors.
Baqui elaborated on the investor sentiment, explaining, "The investor community here has taken sort of an ‘in Hock we trust’ approach. He manages to pull a rabbit out of the hat every quarter and surprise with something new."
Impact of Major Deals and Future Growth Drivers
In the previous quarter, Tan announced a significant development: a new customer had placed orders valued at over $10 billion. This announcement led to a notable 9.4% increase in the stock price the following day, culminating in a record closing price. A similar announcement could help alleviate current investor concerns, particularly as some analysts and investors are worried about the concentration of spending among a select few major technology companies.
In a note on December 8, Ben Reitzes of Melius wrote, "Strength in TPU orders should power Broadcom’s estimates higher through next year. Long-term, we would still prefer success with a diverse set of customers for Broadcom across its seven ‘hyperscale’ opportunities."
While AI is a dominant theme, Broadcom's other business segments remain important. Investors are seeking updates on its software operations, as well as its enterprise storage, broadband, and wireless communication divisions.
However, there is an additional factor to consider: the stock's elevated price point means that even exceptionally strong earnings might not necessarily drive further gains. In fact, it could potentially lead to a decline.
Ryuta Makino, an analyst at Gabelli Funds, offered a concise perspective: "Everybody’s long and maybe some people are gonna sell off just for profit taking."