Broadcom’s ‘Good’ Wasn’t Good Enough—Now the Setup Gets Interesting
Broadcom ($AVGO) shares dropped by 12.6% on Thursday after the AI chipmaker reported solid but unexceptional earnings. The AI infrastructure company beat fiscal second-quarter earnings estimates by about 2%, but barely scraped past revenue estimates.
Stocks like Broadcom and competitors Nvidia ($NVDA) and Advanced Micro Devices ($AMD) have had incredible runs, and now are priced for perfection. Anything less than a stellar earnings report is going to land AI infrastructure high-flyers in the doghouse.
Asking Too Much?
To understand how demanding investors have become of these names, the selloff was blamed on Broadcom CEO Hock Tan’s failure to raise the company’s full-year target for AI chip sales.
It was only three months ago, on March 4, that Tan first said Broadcom’s AI chip revenues could exceed $100 billion for the year.
Three months ago, this news was treated as a revelation, and Broadcom shares vaulted higher by 23%. Now, it’s a disappointment.
Charting Broadcom
Even after Thursday’s decline, Broadcom shares have gained over 20% so far this year, and have soared over 60% over the past 12 months. Thursday’s move seems like an overreaction, and may present a buying opportunity for Broadcom.
Broadcom closed on Thursday at $418. This means the post-earnings selloff merely erased about a week’s worth of gains. Prior to Thursday, the last time Broadcom traded at $418 was on May 28.
Thursday’s decline also pushed Broadcom shares down into an area that has supported the stock over the past month (black dotted line). Broadcom remains above its 50-day moving average (blue), which provides further support just below $400, and its 200-day moving average (red), currently at $355. Both moving averages continue to rise, a bullish sign.
Another consequence of Thursday’s market action is that Broadcom’s shares are no longer overbought, according to the stock’s RSI (relative strength index) indicator. Broadcom’s RSI now reads 48.08, a neutral reading on a scale of 0 to 100 (point A).
Bottom Line
What is Broadcom’s chart telling us?
Despite all the handwringing over Broadcom, this stock is still in good condition. A week’s worth of gains were erased, the stock fell to an area of support, and the shares are no longer overbought. Other than that, not much has changed.
However, things could change. Here’s what to watch out for:
Investors who are thinking of buying Broadcom are in the clear unless and until the stock breaks its key 50-day and 200-day moving averages. If that should happen, especially if the market remains strong and the stock is moving against the grain, then it will be time to consider trimming or exiting the position.
At the time of publication, Ponsi was long AVGO.
