Broadcom's stock price has surged more than 180% amid the AI boom, with its valuation rising to 42 times expected earnings, far exceeding its ten-year average of 17 times. Institutional warnings suggest that investor expectations have become overly saturated, and even strong performance may trigger a pullback. The focus of the earnings report will be on whether AI-related growth can continue, whether dependence on Google can be mitigated, and whether the CEO can once again deliver surprises in terms of new clients or guidance.
Despite the AI boom driving $Broadcom (AVGO.US)$ a significant surge in stock prices and making it highly sought-after as a key supplier to Google's business, the historically high valuation is fostering a cautious market sentiment as the release of its earnings report after U.S. market hours on Thursday approaches.
Broadcom's stock has risen over 180% since hitting a low on April 4, making it the tenth best-performing component of the S&P 500 during the same period and closing at an all-time high on Wednesday. However, this strong AI-driven rebound has pushed the company’s valuation to 42 times its projected earnings, far exceeding its ten-year average of 17 times. In pre-market trading, Broadcom fell by 1.38%.
The market is now not only focused on its single-quarter performance but also concerned that even if results exceed expectations, the risk of a 'sell-the-fact' reaction may arise given that the stock price already reflects overly optimistic forecasts.
Institutional investors such as Huntington National Bank have warned that the current pricing of the stock may already be 'bracing for disappointment,' especially $Oracle (ORCL.US)$ against the backdrop of infrastructure stocks experiencing reduced tolerance for errors following a sharp pre-market plunge on Thursday due to surging capital expenditures.
Investors will closely focus on comments from Broadcom CEO Hock Tan during the earnings call, seeking growth drivers beyond the Google ecosystem. The market widely anticipates that whether Hock Tan can deliver another surprising result will be pivotal in determining if the stock can kickstart another round of gains.
Overheated valuations spark concerns of a potential pullback.
Broadcom has been one of the hottest stocks in the market this year, primarily benefiting from investor enthusiasm surrounding artificial intelligence and related hardware. However, this rally has also made the stock more expensive than ever before. Currently, Broadcom’s price-to-earnings ratio is significantly above its historical average and, among the 'Magnificent Seven,' its valuation ranks second only to Tesla.
Huntington National Bank, which holds shares of Broadcom, saw its global growth equity strategy manager Peter Sorrentino state:
“Our concern is that it feels somewhat like bracing for disappointment.”
He believes investors are being somewhat “overly aggressive” at this point and revealed that his company did not increase its position in Broadcom during the past six months of price appreciation.
Gabelli Funds analyst Ryuta Makino also expressed similar caution. He believes that regardless of the company’s reported figures, Broadcom’s staggering market valuation may have reached a tipping point where even explosive earnings data could prompt profit-taking. “Everyone is long; perhaps some will sell to take profits,” Makino added.
Earnings Expectations and the Google Effect
According to data compiled by Bloomberg, analysts expect Broadcom’s adjusted earnings per share in the fourth fiscal quarter to increase from $1.42 a year ago to $1.87, while revenue is projected to rise from $14.1 billion to approximately $17.5 billion. Revenue from its AI division is expected to reach about $6.2 billion, marking a year-over-year jump of approximately 68%.
This optimism is primarily driven by the central role that Broadcom's custom chips, manufactured for clients such as Google, play in the construction of AI data centers. Janus Henderson Investors has taken a positive stance, with Shaon Baqui, the firm’s technology research analyst, stating:
“Given recent performance, expectations here are clearly high, but for good reason. They are closely tied to the Google ecosystem, and we have all witnessed the recent success of Gemini 3 and what Google has achieved.”
JPMorgan forecasts that driven by continued growth in Google’s TPU deployments and new orders from Meta, Broadcom’s AI revenue could surpass USD 50 billion in fiscal year 2026. In the short term, robust demand for AI networking and custom ASICs is expected to push Broadcom’s October quarter revenue and January quarter guidance above market consensus. Additionally, accelerating synergies from VMware are jointly supporting Broadcom’s optimistic outlook.
Nevertheless, this has also raised concerns among investors regarding customer concentration. In a December 8 report, Melius analyst Ben Reitzes noted that while strong TPU (Tensor Processing Unit) orders should boost Broadcom’s expectations for next year, the market still prefers to see Broadcom diversify its customer base across its seven 'hyperscale' opportunities in the long term.
“In Hock We Trust” and Market Dynamics
Beyond the financial figures, management guidance will be the highlight of tonight’s event. Hock Tan enjoys an exceptionally high reputation within the investor community, and Shaon Baqui described the market as adopting an “In Hock We Trust” attitude because he “manages to deliver new surprises every quarter like magic.”
In the previous quarter, Broadcom announced a new customer order exceeding $10 billion in total, an unexpected positive development that drove its stock up by 9.4% the day after the report. If another new customer announcement can be made tonight, it would help alleviate concerns among analysts and investors about over-reliance on spending by a few hyperscale companies.
At the same time, the market is also looking for signs of recovery in Broadcom’s other businesses, including software, enterprise storage, broadband, and wireless communications. While Broadcom has not struggled as much as NVIDIA, Oracle, and AMD during the recent infrastructure sell-off, Oracle’s pre-market drop of over 11% on Thursday due to weaker-than-expected cloud growth forecasts serves as a reminder that volatility risks in the AI infrastructure sector remain.
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Editor/KOKO