Artificial intelligence (AI) investing has been a major theme in the markets in 2023 and 2024, and will likely be a trend in 2025 as well. One of the top AI stocks that many investors have piled into is Broadcom (NASDAQ: AVGO). The stock is up around 60% this year, making it a top performer in the market.
However, not every investor is confident that Broadcom can continue its run. Point72, run by billionaire Steve Cohen, slashed its Broadcom holdings in the second quarter, selling two-thirds of its stake. After the sale, the position now makes up 0.79% of its total holdings. So the original weighting was fairly significant, especially considering that Point72's current largest holding makes up 1.98% of its portfolio.
With an incredibly successful investor selling this hot AI stock, should you follow suit? Or is this hedge fund just taking gains?
Broadcom's business has many offerings
Hedge funds have different measures of success than individual investors. Because hedge funds need to show their clients that they are performing well each quarter, they often make decisions that are smart in the short term but may not work out as well in the long term.
I think Steve Cohen's move to sell Broadcom may be wise in general.
Broadcom has many different activities and products in the hardware and software industry. On the software side, it has cybersecurity solutions, mainframe software, and enterprise software, but its most notable product is VMware. Broadcom acquired VMware last year for a hefty $69 billion.
VMware provides its clients with access to virtual computers, allowing a single computer to run multiple desktops. This can help clients use the computing power of their servers more effectively, and it is a very popular product.
On the hardware side, VMware is more associated with AI. Its networking switches, like the Tomahawk 5 and Jericho3-AI, are used in data centers by many AI hyperscalers to direct network traffic for maximum efficiency. They also design custom AI accelerators, like those used by Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), to provide better performance in AI computing than a GPU.
This business unit has been on fire, with the ethernet switch business growing over 300% year over year in Q3 and AI accelerators increasing better than 250%. The problem is that Broadcom is so large that other poorly performing business segments drown out the effects of these strong performers.
Broadcom's Q3 results weren't great if you back out the VMware acquisition
Revenue increased by 47% year over year in Q3 fiscal year 2024 (ending Aug. 4), which sounds like a strong quarter. However, if you subtract out the effects of the VMware acquisition, that growth tumbles to just 4%. That's not very strong growth considering VMware revenue was purchased, which makes many investors worried that Broadcom may not be able to capitalize on the AI trend because its business is so wide.
However, it's still expected to do OK during FY 2025, with an average of 37 Wall Street analysts expecting 17% revenue growth and 28% earnings per share (EPS) growth. Once again, that's solid growth, but the issue is: Have expectations become too inflated?
After its run-up throughout 2024, Broadcom now trades for 24 times 2025 earnings -- which isn't a terrible price to pay, but it's still expensive.
AVGO PE Ratio (Forward 1y) data by YCharts.
However, with its growth and valuation, Broadcom is in nearly the same category as other AI leaders, like Taiwan Semiconductor (NYSE: TSM), Meta Platforms (NASDAQ: META), and Alphabet.
AVGO PE Ratio (Forward 1y) data by YCharts.
Of these three, Broadcom's price-to-FY 2025 earnings is the most expensive, but it has fairly similar prospects heading into 2025.
So, investors need to decide if Broadcom is a good pick in this space. Undoubtedly, it has a successful product lineup in some areas but is struggling in others. Compared to the other three, which aren't seeing weakness in some areas, I'm more likely to pick one of the other three stocks as opposed to Broadcom.
While Broadcom may not be an outright sale like Steve Cohen and Point72 have done, there are other options available to invest in.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $24,113!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $42,634!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $447,865!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of November 11, 2024
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Keithen Drury has positions in Alphabet, Meta Platforms, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
