We recently published a list of Wall Street Is Focusing on These 10 AI Stocks as New Year Begins. In this article, we are going to take a look at where Broadcom Inc. (NASDAQ:AVGO) stands against other stocks Wall Street is focusing on as the new year begins.
Dan Niles, Niles Investment Management founder, recently said in a program on CNBC that a slowdown in spending could be a “big problem” for major AI players in 2025. The analyst highlighted that when Satya Nadella was asked whether his company was facing a chip shortage, the head of the Redmond software giant said his company was facing a power shortage, not a chip shortage. Niles said this goes against the claims of Jensen Huang who has been pointing to unprecedented demand for AI chips.
“If you look at the Magnificent 7 (except one) …. they are trading at a low 30 PE. The S&P 500 is trading at a 25 PE, but if you look at the midcap and small-cap stocks, which people have forgotten about because they’re not really AI plays, they’re trading at around 19 to 20 times. They’ve underperformed up until sort of mid-year when the performance picked up. If you look at stocks since June 30th, basically, the S&P is up about 8%, but the NASDAQ 100 is only up 7%. The Russell 2000 is actually up 10% after being only up 1% for the first six months of the year. So you’re already starting to see this broadening out, and I think with the new administration really focused on domestic manufacturing, deregulation, etc., that’s going to benefit the small midcap names more so than names in the S&P 500,” Niles said.
Niles said stocks can face a “rough” time in the first quarter amid the changing posture of the Fed.
“The Fed finally admitted inflation wasn’t transitory. I think that might have been the wakeup call, which is why I think Q1 could be a really rough time for a lot of the, you know, the market as a whole, but a lot of the mega cap stocks as well. As we have to kind of price in the fact that the FED might, you know, they might pause or they might even raise next year, which I think that’s a 50/50 shot of whether they cut, raise, or hold.”
For this article, we picked 10 AI stocks analysts are talking about heading into 2025. With each company we have mentioned its number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Cramer's Take on Broadcom Inc (AVGO): AI Potential and Market Reactions
A technician working at a magnified microscope, developing a new integrated circuit.
Paul Meeks, CIO at Harvest Portfolio Management, was asked in a latest program on CNBC about his thoughts on Broadcom Inc. (NASDAQ:AVGO) and whether he likes the stock because of the company’s partnerships with other players to develop custom AI chips. Meeks said he owns the stock because of this theme.
“I have owned, and I even bought more recently, both Broadcom Inc (NASDAQ:AVGO) and Marvell to address that theme, to embrace that theme, because both those companies showed really nice upside. Their AI revenues as a percentage of total revenues have grown considerably. And yes, obviously the hyperscalers are a little bit frustrated at spending tens of billions of dollars per month on Nvidia’s GPUs, so they’re working very hard in conjunction with Marvell and Broadcom to develop their own. So yes, I own Nvidia, Broadcom Inc (NASDAQ:AVGO), and Marvell.”
Broadcom Inc (NASDAQ:AVGO) continues to be a leader in the AI ASCI and networking chips market. Broadcom Inc (NASDAQ:AVGO) has 3nm AI ASIC chip deals with Alphabet and Meta in addition to many other tech giants aiming massive spending for AI hyperscaling.
However, the stock could face the impact of what Nvidia is facing today: too high expectations.
In the latest quarterly results, Broadcom Inc (NASDAQ:AVGO) revenue was largely in line with estimates. The company has narrowly exceeded revenue expectations by less than 5% in most cases. Some analysts suggest Broadcom’s growth rates will moderate to below 20% CAGR starting the first quarter of 2025. In fiscal Q4, it was +50% topline growth. The market won’t be kind to the stock when the revenue growth rate slows. Broadcom has about $58 billion in net debt, which is relatively high.
Columbia Threadneedle Global Technology Growth Strategy stated the following regarding Broadcom Inc. (NASDAQ:AVGO) in its Q3 2024 investor letter:
“Similar to the earnings results for Nvidia, shares of Broadcom Inc. (NASDAQ:AVGO) initially sold off after the company reported solid earnings that fell light of elevated market expectations, but the stock did recover from its drawdown in the matter of a few weeks. With an enticing combination of custom chip offerings as well as networking assets, Broadcom remains one of the best positioned companies as part of the AI revolution. Broadcom outlined a path to derive a majority of its revenue from the AI end market within a couple of years, and the non-AI part of the business has stabilized after a deep correction. The company’s dominant market position in its end markets, along with durable growth, strong margins and best-in-class capital allocation, presents an opportunity to compound capital over time.”
Overall, AVGO ranks 7th on our list of stocks Wall Street is focusing on as the new year begins. While we acknowledge the potential of AVGO, our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than AVGO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
