We recently compiled a list of the 20 Worst Performing AI Stocks of Last Week. In this article, we are going to take a look at where Broadcom Inc. (NASDAQ:AVGO) stands against the other AI stocks.
US Stocks in September
This September saw a sluggish start for most US stocks, and large-cap technology stocks were no exception to this trend. The main driving factors for this development include concerns over the health of the American economy resurfacing, particularly in light of the August jobs report. The report underscored the labor market’s weakness in the US, which has not left investors feeling all that secure about the state of the economy.
On the stock side, many investor favorites in the artificial intelligence (AI) space have been doing poorly so far in September, with losses ranging from around 4% to even over 20% for the first week of September. The primary reason for this decline seems to be that investors are just not satisfied with the growth demonstrated by major AI companies at present. While growth is definitely present, it’s continuing to fall short of investor expectations, which have increased exponentially in light of the hype cycle created around AI stocks.
Are We Really In An AI Bubble?
The first week of September was actually the worst week for chip stocks recorded in over two years. Many investors are now beginning to wonder whether AI is worth the amount of money being poured into it, resulting in corporate spending on AI coming under greater scrutiny than ever before. The greater scrutiny is predominantly because of investors and analysts now thinking that many AI stocks are overhyped and overvalued and don’t have the means to justify this hype and valuation – essentially, the main concern is that we’re in an AI bubble that’s on the brink of bursting.
However, as with any high-tension market situation, there are diverging opinions as well. In his September 6 interview on CNBC’s “Closing Bell Overtime,” Deepwater Asset Management’s managing partner, Gene Munster, emphatically stated that we are not in an AI bubble. For him, the bigger problem in the AI space is that every other company today is trying to talk about AI and say that it’s working towards AI incorporation in its operations – something that’s leading to a lot of noise in the market, which is drowning out the voices of companies offering real substance in this space. He thus noted that it’s important for investors to be careful not to invest in just any company that says it’s working with AI and instead to focus on the better, perhaps more boring, options in the market.
According to Munster, the main players to keep your money in are predominantly big tech names, as these are the only companies that are poised to deliver substantial growth instead of just generating noise. However, investors are still confused about whether AI is a good place to invest in even today, which is why we’ve compiled a list of the worst performing AI stocks in September so far and explained whether these stocks are worth picking up or if they’re just temporary beneficiaries of the hype around AI.
Our Methodology
We compiled our list by screening for AI stocks that have seen declines of 10% or above in the first week of September, and then ranked the stocks based on their weekly decline as of Friday, September 6. We have also mentioned the number of hedge funds holding stakes in each stock.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A technician working at a magnified microscope, developing a new integrated circuit.
Broadcom Inc. (NASDAQ:AVGO)
Weekly Decline: 15%
Number of Hedge Fund Holders: 130
Broadcom Inc. (NASDAQ:AVGO) is a reputable semiconductor company. It supplies semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide devices and analog III-V-based products. It’s also a leader in the custom ASICs market.
Many investors in AI stocks consider Broadcom Inc. (NASDAQ:AVGO) to be the preferred provider of AI networking solutions. This is primarily because of the company’s Jericho3-AI fabric, which connects up to 32,000 GPUs in high-compute data centers.
An additional plus point for Broadcom Inc. (NASDAQ:AVGO) investors is that it has more diverse revenue streams than other AI players, like Nvidia. Broadcom Inc. (NASDAQ:AVGO) not only offers AI networking solutions but also provides wireless chips and accessories for use in 5G-capable smartphones. Additionally, the company offers optical components and solutions to industrial and automotive companies. Diversification in its business model thus ensures that Broadcom Inc. (NASDAQ:AVGO) rakes in impressive revenues each quarter.
In spite of all this, Broadcom Inc. (NASDAQ:AVGO) has been hit like many other AI stocks this September, primarily because performance does not match up to expectations – regardless of how well the company is actually performing. Investors continue to want more, leading to disappointed hops when these expectations are not being met. Still, Broadcom Inc. (NASDAQ:AVGO) remains a good AI stock to consider picking up.
Broadcom Inc. (NASDAQ:AVGO) was seen in the 13F holdings of 130 hedge funds in the second quarter, with a total stake value of $20.04 billion.
Mar Vista Investment Partners, LLC mentioned Broadcom Inc. (NASDAQ:AVGO) in its second-quarter 2024 investor letter:
“During the quarter, we established new investments in Broadcom Inc. (NASDAQ:AVGO) and Meta Platforms. We initiated a position in Broadcom in Q2. As a skilled aggregator, Broadcom acquires firms, streamlines their operations, and invests R&D dollars in mission critical products that generate industry leading profit margins, robust cash flows and high returns on invested capital. Its primary markets include AI accelerators targeting generative AI applications, networking & wireless semiconductors, and mission-critical infrastructure software solutions.
Broadcom is well-positioned to benefit from the rapidly expanding demand for custom AI accelerator chips that support the evolution of the generative AI market. The company is the second-largest producer of AI accelerator chips behind Nvidia and leads the market in custom AI ASIC chips. Its customers include leading hyper scalers like Alphabet and Meta who are turning to Broadcom for custom silicon due to its performance and cost advantages. We believe the company is a direct beneficiary of a multi-year capital cycle driven by hyper scalers building out next-generation AI factories.
Broadcom recently acquired VMware, the leader in virtualization software targeting the enterprise market. The integration of VMware is tracking ahead of plan as management has simplified its product bundles, transitioned to a subscription revenue model, and reduced operating costs. We believe this simplified go-to-market structure will result in strong top-line revenue growth and expanding operating margins. We believe Broadcom will compound intrinsic value per share in the mid-20% range over the intermediate term as it benefits from the AI-infrastructure build-out, a cyclical recovery in its legacy semiconductor business, and modestly accelerating growth from its infrastructure software business as VMware is successfully integrated.”
Overall AVGO ranks 7th on our list of the worst performing AI stocks last week. While we acknowledge the potential of AVGO as an investment, we believe that AI stocks hold promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AVGO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.