Broadcom Inc. soared nearly 17% after the company reported strong earnings after Thursday’s close. The latest earnings report reaffirmed that artificial intelligence (AI) is a strong force and is here to stay. Let’s take a look at what this could mean for other tech stocks and the broader market.
For the last few years, AI has been a strong, and winning, theme in the stock market. However, some AI stocks have stumbled recently as many skeptics thought the AI theme was over hyped on Wall Street. The Philadelphia Semiconductor Index (SMH) is a basket of semiconductor stocks and has served as a good proxy for tech stocks and AI stocks.
In fact, the semiconductor index is one of the strongest performing groups in 2024. They enjoyed a big run in the first half of 2024, then topped out in July, and have been moving sideways in the second half of 2024. A lot of of people were worried that AI was just a fad and it would not translate into actual revenue and earnings growth for tech stocks. Many AI related stocks stumbled this quarter but there are three that stand out as strong leaders in the AI space: Broadcom, Nvidia, and Palantir. Shares of all three of these stocks soared this year, largely due to strong demand in AI.
A Closer Look At The Quarterly Numbers
In the latest quarter which ended on October 31, 2024 for Broadcom, the company reported EPS of $1.42 compared to $1.11 in the same period last year. It’s important to look at earnings on a year-over-year basis. Why? Because that shows us what happened in the same period on a year-over-year basis. In this case, earnings soared by 28% and revenue vaulted by 51%. Meanwhile, Return on Equity grew by 39.9% which is very strong. Q4 earnings are not the same as Q1, so if you compare Q4 to Q1 you will get different results. But if you compare Q4 this year compared to Q4 last year you can compare apples to apples and get better sense of what is happening in the company. The same is true for every other quarter.
A Closer Look At The Annual Numbers
Now, let’s zoom out and take a look at the annual numbers. We can also see strong growth. In 2020, the company earned $2.22/share. In 2021, earnings grew to $2.80. Then in 2022, earnings jumped to $3.76 and grew again in 2024 to $4.23/share. Looking forward, in 2024, earnings are expected to be $4.87, in 2025, grow to $6.25, and grow again to $7.46 in 2026! That’s very impressive growth considering how big this company already is. Broadcom’s market cap is almost $900B! The fact that earnings are growing so strong bodes well for growth investors.
Big Technical Breakout
Like many other semiconductor stocks, Broadcom has been building a new base and consolidating the big run it had since the summer. The stock is on track to enjoy a big breakaway gap above resistance and hit a new record high at the open. Normally, that is bullish for investors.
Other Considerations:
It is also encouraging to see the number of high ranked funds that own the stock grow from 4861 to 5622 over the last four quarters. The company has strong cash flow, strong earnings growth, and sports a price to earnings (P/E) ratio of only 37. That is 1.5x more than the S&P 500 but lower than other big growth stocks.
What Does This Mean For Other Tech Stocks
Broadcom’s success story is not just about one company’s performance; it reflects broader trends in the tech sector and the economy as a whole. The growing demand for AI-related products and services is driving innovation across industries, from healthcare and finance to manufacturing and retail.
For the tech sector, the AI boom is creating new opportunities and challenges. Companies that can effectively develop or integrate AI technologies are likely to see continued growth and investor interest. However, this also means increased competition and pressure to innovate rapidly. If companies fail to do that, they could be left behind.
Beyond the tech sector, the rise of AI is reshaping the job market and raising important questions about the future of work. While AI is creating new job opportunities in fields like data science and machine learning engineering, it’s also automating certain tasks, potentially displacing some workers. I will be very interested to see how this plays out in the years ahead and how it will impact the monthly jobs report! Overall, I’m optimistic because it will increase our productivity and that should the economy grow.
Investor Considerations
For investors, the success of AI-focused companies like Broadcom presents both opportunities and risks. While the potential for high returns is clear, the AI market is also becoming increasingly crowded and competitive.
Investors should carefully evaluate companies’ AI strategies, their ability to execute on these strategies, and their potential for sustainable growth.
It’s also worth noting that not all AI stocks are created equal. While some companies, like Broadcom and NVIDIA, have seen tremendous growth, others have struggled to translate their AI investments into tangible results.
Final Thoughts
Broadcom’s recent earnings report serves as a powerful indicator of the ongoing AI revolution in the tech industry. The company’s success in leveraging AI technologies to drive significant growth reflects the broader trend of AI becoming an increasingly critical component of business strategies across our economy. It also shows us that demand for AI remains strong.
As we move forward, the AI theme is likely to continue shaping the tech landscape and influencing investment decisions. Companies that can effectively harness the power of AI, like Broadcom has demonstrated, are well-positioned to thrive in this new era of technology-driven innovation. However, as with any rapidly evolving technology, there will be winners and losers. It’s important not to get caught up in the hype. I remember the dot com bubble and the mania in the late 1990’s that culminated in March 2000.
Investors, businesses, and policymakers alike will likely stay focused and informed about the latest developments in AI and carefully consider the long-term implications of this transformative technology. The AI revolution is no longer a future prospect – it’s happening now, and Broadcom’s stellar performance is just one example of its profound impact on the business world. As we continue to witness the unfolding of this technological transformation, one thing is clear: AI is not just a passing trend, but a fundamental shift that will continue to shape our economy and society for years to come. We live in very exciting times!
Disclosures:
I have a position in Nvidia.
Nvidia, Palantir, and Broadcom have all been featured in FindLeadingStocks.com, which is my stock market membership site.