Mega-cap chipmaker Broadcom Inc. (NASDAQ: AVGO) has been trading in a narrow range since gapping higher following its first-quarter earnings report in early March. 

Broadcom stock gapped up 5.70% after the company topped sales and earnings views, as you can see using MarketBeat’s Broadcom earnings data. It rallied to a 52-week high of $648.50 on March 22; in total, Broadcom shares have corrected 7% from peak to trough in the current consolidation. 

On May 4, Broadcom got swept up in a market-wide downdraft, as investors were spooked about regional bank failures and Federal Reserve rate increases.

It’s not unusual for stocks unrelated to the panic du jour to trade lower. Part of that is algorithmic. For decades, it’s been the case that about three-fourths of stocks tend to follow the broad-market trend. 

Shares Rallied In The Session 

But that also tends to correct itself. Broadcom shares rebounded off their lows as the May 4 session progressed and moved into positive territory. 

With a market capitalization of $255.92 billion, Broadcom is the fourth-weighted stock within the S&P 500 tech sector, as tracked by the Technology Select Sector SPDR Fund (NYSEARCA: XLK). The sector ETF was also showing gains mid-session on May 4, while the wider S&P 500 continued to be dragged down by financials.

There’s certainly room for investors to be optimistic about Broadcom. In the first-quarter earnings conference call, CEO Hock Tan said, “We are guiding consolidated Q2 revenue for the company to be $8.7 billion, up 8% year on year.”

Broadcom earnings data show the company beating Wall Street’s sales and earnings views in the past 11 quarters, meaning the company may be issuing conservative guidance. Analysts see the company increasing earnings by 1% this year, and by another 7% in 2024. 

Well-Positioned In Numerous Markets

Broadcom has positioned itself well in the market for data-center chips, as well as storage, broadband, and networking applications. Like every other big chipmaker (and many smaller ones), Broadcom has its sights set on AI. 

Analysts at Morningstar expect “healthy spending in support of text-generation tools such as OpenAI’s ChatGPT. These AI systems use a variety of networking and custom products from Broadcom. That supports Morningstar’s analyst’s forecast for Broadcom’s networking segment to grow in 2023.”

In the most recent earnings conference call, Tan addressed the topic of Broadcom gear used in AI applications, saying, “In 2022, we estimated our Ethernet switch shipments deployed in AI was over $200 million. With the expected exponential demand from our hyperscale customers, we forecast that this could grow to well over $800 million in 2023. We anticipate this trend will continue to accelerate, and mindful that we need even more higher-performance networks in the future.”

Investing For AI

He added that the company has been investing in systems designed specifically to handle AI workloads. 

Broadcom has two major end markets, semiconductors, and software. It breaks down its semiconductor business into broadband, networking, wireless, storage, and industrial categories. On the software side, key categories are mainframe software, distributed software, Symantec cyber security, payment security, and fiber channel storage area network management, which involves configuring and monitoring network switches and storage devices. 

Broadcom analyst ratings show a consensus view of “moderate buy,” with a price target of $679.21, an upside of 10.79%. The company is due to report second-quarter results on June 1, after the market’s close. Wall Street is eyeing earnings of $9.35 a share on revenue of $8.70 billion, but as noted earlier, the company has a history of exceeding views. 

Cyclical Industry

The chip industry is notoriously cyclical, and in Broadcom’s own description, “is characterized by price erosion, wide fluctuations in product supply and demand, constant and rapid technological change, evolving technical standards, frequent new product introductions, and short product life cycles (for semiconductors and for many of the end products in which they are used).”

It’s worth noting that even a mega-cap like Broadcom has a beta of 1.23, meaning the stock is more volatile than the broader market. That higher degree of volatility just goes with the territory when it comes to semiconductors. Of course, volatility is part of the risk-and-reward equation and can lead to market-beating gains at times. 

In that regard, investors should realize that Broadcom has outperformed the S&P 500 on a year-to-date and three-month basis, but is underperforming on a one-month basis, as is the wider tech sector.