Why Broadcom Stock Is Slipping Today

Following a two-day rise fueled by excitement over its artificial intelligence (AI) business, Broadcom (AVGO) is experiencing a decline this Tuesday morning alongside the broader semiconductor industry. Although there were no specific developments regarding Broadcom, its stock performance reflects a wider trend impacting the sector. As of 11:59 a.m. ET, the stock was seen down by 4.4%.

Did Broadcom's Rally Go Too Far?

Investors appear to be reassessing the stock's fair value after its significant increase post-earnings. Broadcom's financial results generally matched analyst expectations, but the strong growth of its AI segment particularly caught investors' attention. The company reported a remarkable 220% increase in AI revenue for fiscal 2024, which concluded on November 3, and anticipated a further 65% growth in the first quarter of fiscal 2025, largely attributed to the high demand for its Jericho 3 Ethernet switches, specially designed for AI networks.

Despite the positive outlook regarding Broadcom's AI efforts, a cloud of skepticism seems to have settled in the market on Tuesday, with major chip companies like Nvidia, Arm, and Marvell also showing declines. The absence of a clear catalyst for the downturn suggests that investors are increasingly concerned that AI product demand may not be as robust as current stock valuations suggest. Nvidia's stock has notably dropped for four consecutive sessions, hinting at fears of a slowdown in AI-related spending next year.

What It Means for Broadcom

Currently, Broadcom's stock price reflects high expectations, trading at nearly 50 times adjusted earnings. Future growth projections might temper as the company deals with the effects of its recent acquisition of VMware, which was completed in November 2023. Nevertheless, with favorable conditions surrounding its AI segment, Broadcom's stock appears reasonably valued and is expected to be a strong contender in the long run.

Author disclaims any financial positions in Broadcom. The Motley Fool has positions in and recommends Nvidia and Broadcom, and also recommends Marvell Technology.

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