Shares of artificial intelligence (AI)-related tech stocks Broadcom(NASDAQ: AVGO), Arista Networks(NYSE: ANET), and Rambus(NASDAQ: RMBS) were all down in Tuesday trading, off by 2.7%, 3.7%, and 3.9%, respectively, as of 1 p.m. ET.
There wasn't much material news around these stocks today, but certainly a jump in long-term bond yields following some recent economic data is making investors jumpy that interest rates won't come down as much or as quickly as thought. And that's doubly true for higher-multiple stocks related to the artificial intelligence buildout.
One Broadcom insider seems to agree that the company's stock has had a good run, with the company disclosing yesterday a key executive sold over $3 million in stock last week.
Economic data: Good news is bad news again?
All of these stocks are related to the AI buildout, and thus trade at elevated multiples. Arista makes the lightning-fast data center switches that enable the data flow needed for artificial intelligence training and inference, and Broadcom makes the key chipset that actually goes in Arista switches, in addition to its own AI custom accelerator business.
Rambus has actually not had a good year like the other two have, down about 8.8% for 2024 thus far. This is because the memory market is still broadly in a downturn at the moment. However, things are looking up for memory from this trough, and Rambus should eventually benefit from the AI buildout, which needs its memory interface solutions that help memory chips communicate with other parts of the computing structure.
AVGO PE Ratio data by YCharts
Still, each of these tech stocks trade at a somewhat higher valuation than a typical stock, and their multiples will be highly affected by rising interest rates. Today, the 10-year Treasury Bond yield rose to a high of 4.4%, which is a new high for 2024. The rise in yields came after a stronger-than-expected Job Openings and Labor Turnover Survey (JOLTS) report this morning, which showed job openings increased slightly and that hiring picked up in February relative to January.
Why is that bad? Because it means the economy may still be running hotter than expected, which may mean inflation remains above the Federal Reserve's 2% target for longer than expected. That may keep the Federal Reserve from lowering the federal funds rate as soon as many expected in the first half of this year. All things equal, a higher inflationary and interest rate outlook will put pressure on stock valuations -- especially high-multiple growth stocks.
Broadcom's director cashed in some chips
Also perhaps fueling today's gloom for Broadcom -- its chief legal officer, Mark David Brazeal, disclosed yesterday he sold nearly $3.3 million worth of Broadcom stock on March 28. While that was only around 5% of his holdings, it's still a large absolute number, and may indicate that Broadcom's strong recent run may hit the pause button.
All in all, today's declines in AI tech stocks don't seem to be a reason to worry, as a pullback is fairly normal for any stock or sector that has been on a strong run.
Moreover, the slight uptick in hiring in February is not terrible news, as a strong economy is certainly better than the recession many were predicting a year ago. Of course, if inflation reaccelerates meaningfully, that would be bad. But for now, the news seems to indicate a mere pushing out of the timeline for inflation to get down to 2% and associated rate cuts, but doesn't seem like a reacceleration with the need to raise rates further... at least not yet.
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Billy Duberstein has positions in Broadcom. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Arista Networks. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
