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Why Broadcom Stock Was Down Today

Motley Fool - Thu Sep 21, 11:14AM CDT

What happened

Shares of Broadcom(NASDAQ: AVGO) were down 2.85% at 10:38 a.m. ET on Thursday. The major market indexes were also down today, but the stock's slide followed a report that Google parent Alphabet was considering dropping the company as a supplier of chips used for artificial intelligence as early as 2027.

So what

Broadcom stock has surged 44% this year, as investors view the company as one of the semiconductors best positioned to benefit from growing AI chip demand. Earlier this year, revenue from AI chips made up 15% of Broadcom's business, but CEO Hock Tan previously said that it could comprise a quarter of the firm's chip revenue by next year.

While Broadcom supplies chips across the IT infrastructure, networking, server storage, broadband, and wireless markets, it faces some concentration risk. For example, sales to Apple account for an estimated 20% of Broadcom's annual revenue over the last two years, with its top five customers making up 35% of the business.

Now what

Another factor to consider is the timeline. With the report suggesting that Google would make the switch as early as 2027, Broadcom would have time to make up for lost revenue. This is why the report is not as bad as it appears at first glance.

Still, investors are using the report as an excuse to sell after a huge run-up in the shares. The stock is trading at a premium to its recent valuation range at a forward price-to-earnings ratio of 19 based on this year's earnings estimate. As investors continue to evaluate where Broadcom fits in the competitive landscape, the shares could fall further before heading higher.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. John Ballard has positions in The Motley Fool has positions in and recommends Alphabet,, and Apple. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.

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