Why Broadcom Stock Dropped 10% Despite Earnings Beating Estimates

One of the leading AI stocks tumbled on Friday, but beat earnings estimates. Is now the time to buy?

The correction among growth stocks continued on Friday, with another high-flying tech name: Broadcom (NASDAQ:AVGO) shares fell nearly 10% despite solid earnings.

Broadcom, a semiconductor stock specializing in AI chips, reported revenue of $13.07 billion in its fiscal third quarter, up 47% from a year earlier and better than analysts’ estimates of $13.03 billion.

The company reported a net loss of $1.87 billion for the quarter, compared with a profit of $3.3 billion in the same quarter a year ago. However, the loss was due to a one-time $4.5 billion tax provision resulting from the intragroup transfer of certain IP rights to the United States.

On an adjusted basis, Broadcom’s net income rose 32% year over year to $6.1 billion, or $1.24 per share, beating estimates of $1.22 per share.

Broadcom didn’t exactly beat estimates, but the numbers probably don’t justify such a steep selloff. But Friday’s selloff was likely related to other factors.

Earnings improvement led by AI chips and VMware sales

Broadcom has been riding the AI ​​wave in recent years as a chipmaker that moves data between networks, primarily in mobile and broadband networks, unlike NVIDIA and other chipmakers that make GPUs and CPUs for computers, cars, smartphones and other devices.

The company’s growth in recent years has been fueled by the AI ​​boom, with its chips built to process AI-related data.

“Broadcom’s third-quarter results reflect the continued strength of our AI semiconductor solutions and VMware,” said Hock Tan, Broadcom’s president and CEO, in the company’s fiscal third-quarter earnings report.

Tan said the company expects to generate $12 billion in revenue from AI in fiscal 2024, driven by Ethernet networking and accelerators for AI data centers, up from its previous guidance of $11 billion for AI chips.

But it also saw a significant boost in revenue from its acquisition of cloud computing company VMware late last year.

CFO Kirsten Spears explained the impact of VMWare on revenue, saying, “Including VMware’s contribution, consolidated revenue was $13.1 billion, up 47% year-over-year, while excluding VMware, revenue was up 4% year-over-year.”

Why did Broadcom’s stock price fall?

There were probably a few reasons why investors were unhappy with the earnings report. While AI and VMware drove sales, the company’s non-AI networking revenue was down 41% year-over-year but up 17% quarter-over-quarter.

Broadband revenues also fell 49% year over year. While this represents only about 8% of semiconductor revenues, it is a sharp decline and is expected to remain weak as telecom and service provider spending continues to stall.

“In the fourth quarter, we expect broadband to decline by more than 40% year-on-year, but we expect the recovery to begin in 2025,” Tan said.

That’s another reason why Broadcom’s stock price fell on Friday. The company forecasted revenue of $14 billion for the fourth quarter, slightly below the $14.13 analysts had expected. However, that’s up 51% from the same quarter a year ago, and it would increase revenue to $51.5 billion in fiscal 2024.

Broadcom also targeted adjusted EBITDA of 64% of sales, up slightly from 63% in the third quarter.

Should You Buy Broadcom Stock?

The P/E ratio jumped after the earnings announcement, but that was due to a net loss from a one-time tax provision. Overall, the stock is fairly valued considering its tremendous growth.

Broadcom shares are up 27% after Friday’s selloff, and analysts are still bullish, with a median price target of $196 per share suggesting a 42% upside. The stock received multiple price target upgrades on Saturday.

Friday’s selloff seems overblown. It could have something to do with the unemployment numbers or the overvalued tech sector overall. Given the huge expectations for AI stocks like Broadcom, the underperformance isn’t all that concerning.

I would not sell a stock that has returned 36% per year over the past five years and 32% over the past ten years.

In fact, today’s selloff is probably a good opportunity to consider one of the best AI stocks.