AVGO Stock Breaks Down as Broadcom Earnings Meet Overvaluation Reality Check
Investors were taken aback by the rapid selloff caused by Broadcom's high valuation, despite the company's strong profits.
Quick overview
- Broadcom reported strong earnings, exceeding expectations in revenue and adjusted EPS, but the market reacted negatively with a sharp selloff.
- Despite a significant rally leading up to the earnings report, Broadcom shares fell over 10% following the announcement, indicating a shift in investor sentiment.
- Concerns about declining gross margins and Broadcom's high valuation may have contributed to the stock's decline, as investors question the sustainability of its AI-driven growth.
- The company's market capitalization remains high, trading at multiples that leave little room for disappointment, prompting skepticism among investors.
Investors were taken aback by the rapid selloff caused by Broadcom’s high valuation, despite the company’s strong profits.
Broadcom Delivers Strong Results—But the Market Isn’t Impressed
Broadcom closed out the week with one of the more encouraging earnings reports, highlighting its growing influence in critical areas such as artificial intelligence and data infrastructure. The semiconductor giant continues to benefit from the surge in demand for AI-related hardware, and its expanding margins reinforce its status as a key player in the ongoing digital infrastructure boom. However, the market response told a very different story.
Instead of rewarding the company for its performance, investors rushed for the exits. Broadcom shares fell more than 10% the day after the earnings release, signaling a dramatic shift in sentiment.
A Sudden Reversal After a Powerful Run
Leading up to the report, AVGO stock had been on an impressive rally, driven largely by major AI chip wins and optimism around long-term growth prospects. That momentum abruptly reversed late last week. Following the company’s fiscal fourth-quarter report, the stock dropped sharply and continued sliding into the new week.
AVGO Chart Weekly – The 20 SMA Has Been Broken
In just two trading days, Broadcom shares fell from a record high of $414 to around $340—an 18% decline. The stock is now testing its 100-day simple moving average, a key technical level that traders often watch for signs of further weakness or stabilization.
AVGO Chart Daily – Testing the 100 SMA
Key Earnings Pointers:
- Revenue: $18.02B vs $17.49B expected (28.2% YoY, 3% beat)
- Adjusted EPS: $1.95 vs $1.87 expected (4.3% beat)
- Adjusted EBITDA: $12.22B vs $11.64B expected (67.8% margin, 5% beat)
- Q4 Revenue Guidance: $19.1B midpoint vs $18.29B expected
- Operating Margin: 41.7%, up from 32.9% last year
- Free Cash Flow Margin: 41.4%, up from 39%
- Inventory Days: Improved to 36 from 54
- Market Cap: $1.95T
Margins Raise Eyebrows
While Broadcom exceeded Wall Street expectations for the quarter, management commentary raised some concerns. During the earnings call, executives noted that gross margin is expected to decline by roughly one percentage point in the first quarter. The primary reason is a higher proportion of AI-related revenue, which appears to carry slightly lower margins than some of the company’s other businesses.
This revelation suggested that while AI is driving growth, it may not be as profitable—at least in the near term—as investors had hoped.
Valuation May Be the Real Issue
Still, the sharp selloff likely has less to do with margins and more to do with valuation. Broadcom’s market capitalization recently hovered around $1.6 trillion, placing it among the most expensive companies in the sector. Analysts project fiscal 2026 revenue of nearly $96 billion and adjusted earnings of about $10 per share.
At those levels, the stock trades at close to 17 times forward sales and more than 34 times forward earnings—multiples that leave little room for disappointment.
What Investors Are Questioning
With shares pulling back, the market appears to be sending a clear message. Either investors are questioning whether Broadcom’s AI-driven growth can be sustained, or they are skeptical that its exceptionally high profit margins can last. In reality, it may be a mix of both.
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