The Fault, AVGO, Is in Ourselves

This morning’s headline grabber is the stunning fall in Broadcom (AVGO) shares, which are plunging nearly 15% after a poorly received earnings report.  The results weren’t bad, per se, with adjusted EPS of $2.44 beating the $2.40 analyst consensus, but relatively weak guidance proved problematic.  We have said before that an EPS beat is a necessary condition for a post-earnings rally, but solid guidance is the sufficient condition.  Nonetheless, we need to consider how much of today’s decline results from recent unbridled enthusiasm.

A two-day chart shows just how much damage was done to AVGO between yesterday’s peak and today’s trough.  We were flirting with $500/share in yesterday morning’s pre-market; we’ve had a dalliance with $400 several times this morning.

AVGO, 2-Days, 2-Minute Candles

Source: Interactive Brokers, past performance is not indicative of future returns.

Yet when we look at a slightly longer-term chart, we see that all we’ve done is giver back the pre-earnings enthusiasm that was priced into the stock in the lead-up to yesterday’s report:

AVGO, 8-Days, 5-Minute Candles

Source: Interactive Brokers, past performance is not indicative of future returns.

Yes, we’re lower than where we spent most of last week, but not appreciably so.  To my mind, that raises the question about who to blame for today’s negativity. 

There is no obvious way to sugarcoat a key data point.  AVGO offered guidance that fiscal Q3 semiconductor revenue will be $16 billion, well below analysts’ consensus expectations for $17.2 billion, even as total revenues are projected to be about $29.4 billion, ahead of the $28.6 billion estimate.  In an environment where AI-related spending is THE THEME, a shortfall in that area is indeed problematic.

But we can’t ignore the stock’s move prior to the report as a factor in its decline today.  It is quite clear that immense optimism was being priced into the share price in the lead-up to yesterday’s announcement.  This was yet another manifestation of FOMO at play.

After some extraordinarily well-received earnings reports boosted tech stocks like Micron (MU) and DELL in recent weeks, it appeared that few traders wanted to risk missing a similar result from AVGO.  Thus, amid a tech rally that frenetically boosted all sorts of AI beneficiaries, the usual pre-earnings caution was flipped on its head.  Never mind that positive results from Nvidia (NVDA), perhaps the closest analog to AVGO among major semi stocks, failed to result in a post-earnings rally – the enticement of a potential game-changing rally was too alluring.  Instead, we find today’s debacle in AVGO taking us all the way back to – wait for it – its longer-term trends.

AVGO, 6-Months, Daily Candles, with 20-Day (blue) and 50-Day (purple) Moving Averages

Source: Interactive Brokers, past performance is not indicative of future returns
Investors’ mindsets are certainly along the lines of “if life gives you lemons, make lemonade.”  Tech is indeed acting poorly today, dragging down the Nasdaq 100 (NDX) by about 0.6% and weighing upon the S&P 500 (SPX).  The latter index, however, has risen steadily throughout the morning and is now about 0.3% higher shortly after noon ET.  The reason for that is a solid rotation from tech into other sectors.  In fact, of the 11 SPX sectors, only Technology and Telecommunications are trading lower.  Meanwhile, Healthcare and Financial Services are up more than 2.5% each as traders seek out some overlooked, defensive sectors.   Advancing stocks on the NYSE are outpacing decliners by a roughly 2:1 margin and more than 250 SPX components are up rather than down.  It’s another positive day, except for those who have chased tech stocks in the past few days.

Looking ahead, we have a key economic report tomorrow morning when the May employment report is released.  Economist estimates are for a gain of 85,000 Nonfarm Payrolls, down from 115,000, and the Unemployment Rate is expected to remain unchanged at 4.3%. Options traders seem unconcerned as well, with only a very modest bump in volatility being priced into index options that expire tomorrow.  Why expect anything worse in this environment, right?