Motley Fool Hidden Gems Investing - Broadcom’s Stock Whiplash

Starting point is 00:00:00 We've got Broadcom stock whiplash today on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors, Lou Whiteman and Matt Frankel. Today, we were going to do a little, kind of mix it up a little bit. We thought we're going to do a bunch of different segments and, you know, do some basically non-earnings takes because it's June. We don't normally get a lot of surprise earning stuff. But then Broadcom had to go and give its earnings, and now its stock's down, I think, almost 15% as we are taping today. As we're going to get into it, I'll let you guys really digest the numbers here. But by all objective metrics, all the numbers looked good.

Starting point is 00:00:43 The guidance looked fine. Is this really just expectations game, Lou? Yeah, I think it is. Expectations are everything, right? It's glass half full, glass empty. Stock's up 15%, just tenning into earnings. When you get that sort of expectations, any slight hiccup, any slight sneeze can set you back. This was a slight miss on revenue, but you know, look, it's brutal when people are expecting enough. Apparently it was enough to outweigh 140% gains in AI semiconductor sales, which I don't know, Tyler, sounds pretty okay to me. Yeah, Matt, you were the kind of task a little bit more with the nitty gritty of the numbers here. What did you see in this that was like, maybe not great? I don't know. It's kind of hard to look at these and say, yeah, we should

Starting point is 00:01:31 definitely be dropping the stock by 15% because that's just what we do these days. Yeah. And it's not only Broadcom, CrowdStrike also reported. We're getting all the reports from companies that use weird fiscal years and some of them haven't been too impressive. But there was a lot to like here. 48% revenue growth. They beat on the bottom line. As Lou said, 140% roughly growth in AI semiconductor revenue. The guidance was strong, but if you look into the guidance, the AI revenue that they're guiding for is not quite what the market expected. So that could be driving a little bit of the sell-off. Any slowdown in AI or perceived slowdown is enough to scare investors. And it's not just that it was running up 15% heading into earnings. Broadcom was up 90% over

Starting point is 00:02:14 the past year. So in a nutshell, the stock went into the report priced for a blowout quarter and blowout guidance. And it was a good quarter. I wouldn't call this a blowout quarter, especially on the AI side of the business, not a blowout. Yeah, we certainly did see a lot of blowouts this most recent quarter, looking at a lot of these suppliers, Taiwan, Semi, and basically everyone was like, everything is awesome. With Broadcom's numbers looking pretty good, it was almost like comparing to everyone else. It's like, well, they were that good. Can you do as well?

Starting point is 00:02:49 And this kind of touches on a couple of top themes and topics we've discussed so far during this week. The three of us were on the show on Tuesday. We were talking about how much does narrative play into your thesis? And narrative kind of is also valuation-based. And we were talking about this with Dollar General because as a value play, as a stock, you kind of are betting on a return to median, return to average kind of valuation. Right now, we're kind of all the narrative is defying expectations to justify very high valuations. And at the same time, too, it touches on this idea of kind of the start-stop, whack-a-mole discussion about the AI build-out that Lou, UI, and Travis were talking about yesterday, where it seems like every couple months here, we're talking about the next bottleneck. At first, it was going to be chips, right?

Starting point is 00:03:44 And then it became memory chips. And now we're talking about, you know, the old companies like Dell that are just building like off products. And we can name like 15 other suppliers where somewhere there's like a stop start going on here where somebody is doing awesome. But then, you know, just because they didn't blow out earnings, they're going to have a 15 percent stock drop. Yeah. So two points here, one macro, one micro, I guess. first of all, the macro, the narrative. I think you are so right. And I think investors better be watching the narrative right now because there is a real, real indication that nothing is good enough. I mean, look at what happened with NVIDIA's quarter. Look what the stock did

Starting point is 00:04:24 there. Expectations are so out of this world right now that I don't know if any company almost can satisfy the market long term. For strong companies that can outlast the cycle, That's just kind of an annoyance. But if you are in some of the, I guess, more speculative AI companies, I think this should be a warning sign to you that nothing is good enough. So look out below. Specific to Broadcom, look, there are massive expectations still up ahead. CEO Huck Tan is forecasting $100 billion in annual AI chip revenue in fiscal 27. They're on pace to do about half of that this year, Tyler. And it took triple digit gains to get to that $50 billion that they hope to do this year. I see that. I see the stop-start nature of this, sort of the questions about potential fragility.

Starting point is 00:05:16 And it kind of scares me. You add in the fact that OpenAI and Anthropic are going to account for a lot of that growth. Those are two very different companies right now. And even if OpenAI sort of gets their act together and kind of does well, you are putting a lot of eggs in just a couple of baskets with that customer concentration. I'm not predicting Gloom. Broadcom's a good company. But right now, it's just hard to look at this and say, yes, everything's fine. Everything goes up from here. One other thing, software revenue, which is supposed to be recurring, so to kind of balance this out, that only grew by 9%. So all of this growth is going to have to come based on their ability to keep selling hardware at really amazing levels. We'll see how long that lasts. To Lou's point, the expectations are huge here. You mentioned they're predicting about $100 billion of AI revenue in 2027.

Starting point is 00:06:11 About $40 billion of that, a little more is expected to come from Anthropic alone. Open AI is a big client. So, I mean, the Anthropic and Open AI IPOs are really worth paying attention to. You know, Anthropic just raised $65 billion. We've talked about this with other companies. I think Oracle was one of them where, yeah, these commitments they're going to need to pay for. They raised $65 billion. Open AI raised $120 billion recently. That's not going to be enough for all of their commitments. So these IPOs really need to go well. They need to get strong valuations. It's, you know, the open AI and anthropic IPOs are probably the single most important near-term story for Broadcom investors to watch. I mean, the 2027 and 2028 growth story

Starting point is 00:06:53 for the company, which the IPOs are going to directly support, it's largely intact for now, but that could change if demand cools off. Yeah. And we'll be getting into that in a later segment, but the amount of money that needs to be raised this year to make those commitments to Broadcom and all their other suppliers is looking pretty hefty and could have some pretty profound impacts on the market in general beyond just those individual companies. But we're going to hit that after the break. But before that, we're going to actually take a pause from the AI discussion and just kind of look at some other sectors and some stocks that are really changing on the narrative

Starting point is 00:07:33 of the sector that they're in. We'll hit that after the break. I was reading an investing newsletter a couple of days ago, and there was a quote from the chief economist at Apollo talking about diversification and the importance of it. And this was kind of an interesting quote to me. It was like, factor investing tells investors not to be overexposed to just one factor. And what he said was the new 60-40 is now the AI versus non-AI kind of thing. And for those who aren't familiar, 60-40 was kind of like the benchmark gold standard for individual investors. People probably not picking individual stocks, you know, 60% of your money in stocks, 40% of your money in bonds. Maybe you start changing that as you get older. But it was kind of like the standard benchmark that most wealth advisors told you to do to get diversification in the market. And, you know, as this quote is saying, it's now not just the factor of bonds versus stocks, but it's also like how much diversification do you have away from AI?

Starting point is 00:08:40 So in the spirit of that, we wanted to dedicate a whole segment to basically sectors and parts of the market that just aren't AI. And specifically, we've had a pretty bifurcated market so far. We've had some industries doing extremely well and others have been taking a bit on the chin. I think insurance, health care, biotech has done surprisingly not well, while energy, semiconductors, technologies absolutely fly. So in that sort of vein, we played a little game with these guys. I each wanted you guys to pick one stock from an industry and find the stock that you find that is kind of bucking the sector trend. Like, is there a company that's doing lousy in these awesome sectors or a company that's doing gangbusters in a downtrodden sector? So I want to start with you, Matt.

Starting point is 00:09:32 What's the sector in the stock that you're like, this is kind of interesting? Well, it's been a long time since I've gotten to talk about real estate because all we talk about is AI and SpaceX lately. So I'm going to bring up a real estate stock. That's the whole point of this segment. Right. So I'm going to bring up a real estate stock. So, you know, over the past three months, the S&P 500 as a whole has gained about 11 percent, mostly because of the mega cap tech stocks. Meanwhile, the real estate sector has been almost exactly flat.

Starting point is 00:10:00 It was up 0.02 percent as I was looking this morning. There are some good reasons for it, to be fair, specifically the fact that inflation is at its highest level in three years. There are legitimate concerns about the Fed raising rates. Real estate's a very rate sensitive sector as a whole. One that has really bucked the trend is Ryman Hospitality Properties, ticker is RHP. It's up 18% in the past three months, even beating the S&P, not just the real estate sector. Hotel real estate is generally less rate sensitive than other real estate subsectors. So unlike things like warehouses and retail properties, which rely on long-term leases,

Starting point is 00:10:36 have predictable cash flow, hotels, quote, rent their space by the night and share prices therefore are more governed by the business performance, which can really ebb and flow over time. So Ryman's business has been impressive. In the first quarter, revenue and net income were at all-time highs for that time of year. The company raised its full-year guidance. Average daily rates for the hotel rooms and out-of-room spending were both up by double digits year over year. Their entertainment division is performing really well, especially that old red dining and entertainment brand just announced its seventh location. Its flagship Vegas location is dramatically outperforming expectations. Adjusted FFO, funds from operations, which is like the

Starting point is 00:11:16 real estate version of earnings, grew by 19% year over year. That's a rapid pace for real estate. Permit me a little bit of a follow-up question here. When I think hospitality too, though, I do think like sensitivity to macroeconomic factors. So when you look at Ryman, because it is a hospitality REIT, is this a specific REIT that has some sort of, call it macroeconomic macro vibes resiliency in it with its business model? Or is it a little bit of ride the wave until it's no longer working? Well, that's a really good question because they're a group focused hotel. And the reason that that's important is that, you know, they focus on conferences, conventions, things like that. And these tend to book three, four

Starting point is 00:11:59 years in advance. So they have a lot of future revenue visibility as opposed to like, you know, an operator of like a Hilton or, you know, a non-group focused hotel. They have some resilience And you got to think of what they're being compared to year over year. International travel was way down a year ago. That's coming back a little bit. You know, group events are a very resilient part of the hotel market. So, yeah, you bring up a really good point. I wouldn't really want to invest in a leisure hotel operator with macro uncertainty.

Starting point is 00:12:30 But one that has that group focus business, which is more than half of Ryman's business, does have a little more visibility. Lou, I think we're not going to do anything real estate related with what you're looking at here. No, no, no. I will say, though, I'd rather own Ryman than stay at the Grand Ole Opry. So, you know, there's that for it. Look, I'm looking at the transports. I'm going to, you know, play my greatest hits, too. But it's been a pretty crummy few years for the transports. There were a lot of factors driving that.

Starting point is 00:12:58 We were coming down from kind of a sugar high of the pandemic where everything was shipped ASAP. We've had the added uncertainty of tariffs, trade wars, and macro concerns slowing economy. Big customers tend not to stock up on inventories if they're worried the economy is slowing. So it all has added up to underperformance, really crummy numbers. NASDAQ Transportation Index has underperformed the market by 25 percentage points over the last three years. In that environment, XPO, a trucking company, is up 340 percent, easily beating both the transports and the broader market. Now, some of that is good fortune. A big competitor, Yellow, liquidated. XBO picked up a lot or a good bit of that business at literally

Starting point is 00:13:44 prices that made it even a positive just from day one. But it's also management deserves a lot of credit here. This is a story of simplification. They have split out a couple other units to just focus on one thing and being good at one thing. They shedded unrelated businesses that are fine on their own, but not part of the story. They also hired a ton of really, really good people from competitors that quite frankly were doing better than them. And they've started to shift their focus to margin over volume. This is, I think, sustainable. We've seen with Old Dominion how a good operator over time can just outperform the sector and the market just based on the strength of their operations i think xbo has elevated itself to that level similar follow-up

Starting point is 00:14:30 and this is kind of a discussion you and i i think we had a couple years ago too where it felt like a time where like trucking especially was like you've got old dominion xbo is up and coming but you had a lot of subpar operators in this industry and so it kind of was old dominion and to a lesser degree xbo is kind of like taking candy from a baby taking market share here because they couldn't seem to get their hand out of the paste jar. So it seems like that's less the case now. I mean, obviously, Old Dominion, XPO are dominant players here, but some of the other players in the industry have found religion, I guess you will, on margin, on capacity additions at a reasonable rate. With that in mind, with the kind of the outperformers like XPO and Old

Starting point is 00:15:19 Dominion that had done so well, now that they're facing more competent competition, is the growth opportunities as robust here, or is it kind of a little bit more of a knife fight for share? So a couple of things going on, I think. For one, until recently, XPO didn't deserve to be in that conversation as a good performer. So what you've seen is sort of them enter this. I think it's a more of a risk for, say, an old Dominion, which has benefited over the years for just being the only ones who could get pricing right uh the other answer is scale uh you know at the end of the day you still have advantages to scale that you can be more efficient even if it's just kind of the super friends a couple of players that are really really better than anyone else there's enough

Starting point is 00:16:04 business out there xbo is finally trading at a multiple similar to old dominion which you never saw a few years ago. I do think probably the 340% over three years that we can't repeat that, that a lot of that was plain catch up. But I think that, like I said, Old Dominion is the model. I think there is room for a few companies here that just outperformed their peers and over time outperformed the market. Trucking, as boring as it sounds, it's been a weirdly fascinating industry over the past, like, I don't know, at least decade to follow. So interesting to see XPO kind of, fight, you know, I could almost say like getting down to fighting weight, I guess would be the best way to put it so they can compete. So I'll give my answer here too, because one industry

Starting point is 00:16:52 that's been quite lousy this year and so far a year to date, and as well as kind of over the past year or so has been insurance. And obviously there is reasons for that. Insurance is a cyclical industry and a lot of the underperformers in the insurance industry in general have been a lot of high flyers, especially your specialty insurers and things like that. And you're also seeing a lot of pricing pressure on the big lines of insurance that we see, like automotive and home motors, some of the biggest prices. A lot of these competitors are trying to take share, and when you take share, profitability sinks, and that tends to hurt stocks. But health insurance in particular has been hit even harder. Rising costs are getting hard to

Starting point is 00:17:37 control, plus lots of backlash from patients. And just in general, kind of the feeling towards health insurers has been kind of not great because high rates of denials, higher co-pays. It's the stuff that frustrate people using their health insurance. And it's led to quite a bit of unpopularity. This is where there's like this one company that seems to be like separating itself from the rest here. And obviously, it's a small one. So it has that opportunity. It's called Oscar Health, ticker is OSCR. And they kind of straddle this health insurance technology, health insurance broker business. Most of what it did was when it got started in 2012 was it was kind of contingent on the American Health Care Act or the Obamacare marketplaces. And what

Starting point is 00:18:23 it did was it set up programs where small business owners would let their employers buy individual insurance. And using Oscar's kind of platform, the employer would basically reimburse the individual for it. And that would allow them to meet their compliance for insuring their customers while giving them more, or employees, excuse me, while giving them more options. And actually it was a way of relatively controlling costs because there were some subsidies related to using the marketplaces. So it kind of worked for a while, but when the marketplaces, Obamacare marketplaces were doing well, but many insurers have left that program And it's been kind of like walking in the woods trying to figure out what it wants to do next and figure this out.

Starting point is 00:19:06 And it's starting to gain traction here. It's now more focused on providing individual insurance themselves, taking more of the underwriting burden. And so far, they've done a decent job. Their combined ratios have been varying. I think their health loss ratios were like 70% in the most recent quarter. Combined ratio is 87, 88, which by insurance standards is quite good. Any insurance, almost any line that you're looking at below a 90% coverage loss ratio, which is basically how much you have to pay out in costs for healthcare or auto claims

Starting point is 00:19:43 or anything like that relative to the premium bring in. So, you know, it's basically saying you have a 10% operating margin. Industry lingo. I know it's kind of silly, but it works pretty well for an insurer. And despite the fact that they've been kind of winding down some big name programs, like they had a program with Cigna that didn't quite work out, they've been focusing more on the individuals, it seems to be working. And we're not saying they're out of the woods yet, and I'm not wholeheartedly going to pound the table to say this is an awesome company now, but it's very interesting to see. And obviously, the stock is reflecting the fact that they are getting some traction with what they're doing. Coming up next, we're going to get into listener questions about all these massive IPOs coming

Starting point is 00:20:27 tomorrow. Hey, all, just a reminder, we love answering your questions. If you do want your question answered on air, go ahead and email us at podcasts at fool.com. That's podcasts at fool.com. Three rules, as always. Number one, keep it foolish. Two, keep it short enough for us to read.

Starting point is 00:20:46 And three, we cannot give personalized advice, so let's try to keep it relatively generic. And as long as we've been taking questions, what we have seen more than anything else so far is questions about SpaceX, Anthropic, and open IPOs, specifically to how they're going to impact the broader market. We're talking about early index inclusion for a lot of these companies because they're going in so big, and the questions have been numerous. But here's two that are most representative of what we're talking about. This was from Ben Jackson. With the recent changes to the Nasdaq index and immature over-valued companies like SpaceX IPOing with little supply. I mean, he's being a little diminutive here, but should your average ETF investor or index investor be reconsidering or selling their ETF portfolio to avoid the long-term turbulence that, you know, these large IPOs going into these ETFs may cause? And this one is from Thomas Bianco, is if we already know that approximately $4 trillion of new money will be sucked up in these three IPOs, basically the combined market value they think is going to be around $4 trillion for all three of them when they go public, how can we adjust our current equities positions to account for these forthcoming disruptions? Now, I want to just give a little bit of context here because all the money we're going to be sucking up

Starting point is 00:22:09 with these large ones. Right now, data from the Federal Reserve of St. Louis says that about $8.1 trillion is in money market funds as of fourth quarter of 2025. That sounds like a lot, but you also have to factor how much is in the market in general. And we have a thing at The Motley Fool, it's called the Potential Growth Indicator,

Starting point is 00:22:32 And basically, it takes all the cash that's on the sidelines or in money market accounts, like the FRED data says, and then divide it by the total stock market valuation, which is at about 10.1%. And over the past 30 years, that is a little bit on the lower side. You could say that that's saying everyone's pretty optimistic. They want to be in the market relative to what we see in other different times. So with those little factoids there, the amount of money that we're talking about here, guys, what do you have to say to Ben and Thomas's questions here? So I think the first thing we should note is, is that the IPO headline number isn't the same as the money raised. SpaceX is looking for a $1.8 trillion IPO valuation, but it's only actually raising $75 billion. That said, $75 billion is a massive number for an IPO. So I think the point is still relevant. You know, the net impact, though, I'm not sure what I think. It might suck money away from other areas because, again, we have a lot of demand here. $75 billion worth of money has to be found here. But over the next six months, billions of dollars in SpaceX stock is going to be unlocked and free to trade. These are people who got in before the IPO. If those insiders decide to sell, that could free up at least $75 billion, if not more, for other opportunities that could impact other stocks in a positive way.

Starting point is 00:23:54 It actually could be a positive impact in some ways, Tyler. Bottom line, though, is the only thing we know for certain is it's going to cause volatility. I personally am not going to reposition things or do anything in anticipation of this. i think that yes there could be volatility but over time i think this will balance itself out as a long-term focused investor i'm not going to lose sleep on this i'm going to kind of just make some popcorn and watch it yeah like lou said the money raised won't be in the trillions of dollars but the latest forecast is for around 240 billion across those big three you know spacex anthropic and open ai but just to put that in context in 2025 the entire ipo market all companies

Starting point is 00:24:36 raised about $45 billion combined. The largest U.S. IPO previously raised about $22 billion. So we are in uncharted territory. There's plenty of money on the sidelines, as Tyler mentioned, the money market accounts. But the reality is that a lot of money flowing into these three IPOs is going to have to come from somewhere. And existing stock investments are probably going to be a big source. Specifically, I would think that most people are going to sell MAG7 shares to to, you know, invest in some of these. No one's going to sell like their realty income stock to buy SpaceX is kind of my point there. Tesla could be an interesting one to watch. A lot of, you know, Elon Musk fans could sell some of one Elon Musk stock to buy another. But on the other hand,

Starting point is 00:25:17 there is a case to be made that there's going to be a lot of new money flowing into the market this year, not just because of these IPOs. These IPOs are certainly increasing the overall interest in the stock market by retail investors. As we're recording this, I actually got a notification from my broker that the SpaceX IPO is available. So a lot of people are taking notice. It's going to be an interesting year for sure. All three could create significant short-term volatility. But like Lou said, I'm not losing sleep over it.

Starting point is 00:25:43 I think it's going to work itself out in the long term. And I'm not planning on buying any of these three on day one, at least. I feel like we're probably all going to get that email, that SpaceX email from our brokers in the next week or so. I want to just actually conclude with this too about ETFs and allocations and things like that. this is an important thing for people to consider when they're buying ETFs. Like say you're buying

Starting point is 00:26:05 a broad-based S&P 500 ETF, there are two different types. There are market cap weighted ones, which is obviously the ones that are going to be most influenced here by the large amount of money going into them. But there's also equal weight cap or equal weighted indices as well, where instead of doing you know market kpass it's every single company at the uh every single way uh equal ways it's pretty self-explanatory ones like this are obviously going to probably see less volatility relative to these sorts of trades and if you are looking to get broad exposure to an entire market but are perhaps more skittish i guess you could say of these mega cap companies coming in and becoming a larger and larger portion of what's supposed to be a broad-based index, there are

Starting point is 00:26:58 equal weight index options out there that might be worth considering. As always, people on the program may have interests in the stocks we talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. thanks for producer Dan Boyd and the rest of the Motocool team

Starting point is 00:27:24 for Lou, Matt and myself thanks for listening and we'll chat again soon

Motley Fool Hidden Gems Investing - Broadcom’s Stock Whiplash

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