Stock Story -
What Happened: Shares of fabless chip and software maker Broadcom (NASDAQ:AVGO) jumped 6.1% in the afternoon session after markets rebounded (Nasdaq up 1.8%, S&P 500 up 0.8%) after shaking off the initial negative reaction to the August inflation report by the Bureau of Labor Statistics. The report revealed that CPI (Consumer Price Index - a gauge of the average price consumers pay for goods and services) for the month of August 2024 came in line with expectations, growing 0.2% month on month.
A concerning aspect of the report lies in the core CPI (which excludes food and energy prices), which revealed a 0.3% increase from the previous month, slightly exceeding the expected 0.2%. Despite this, annual inflation seemed to be easing, rising by 2.5%, the lowest level since February 2021. The improved market sentiment suggests investors still very strongly believe that the Fed will cut rates later this month.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks such as those in the technology sector, where the current value depends more on cash flows many years out in the future.
Is now the time to buy Broadcom? Find out by reading the original article on StockStory, it’s free.
What is the market telling us: Broadcom’s shares are quite volatile and over the last year have had 21 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 5 days ago, when the stock dropped 10% on the news that the company reported second-quarter earnings results. Its revenue guidance for the next quarter was underwhelming, and its inventory levels slightly increased. The market was also somewhat disappointed by the performance of its AI business, with revenue in the segment flat compared to the previous quarter.
On the other hand, Broadcom beat analysts' EPS expectations during the quarter. Its gross margin also improved. Zooming out, we think this was a decent quarter featuring some areas of strength, but guidance is weighing on shares.
Broadcom is up 45.8% since the beginning of the year, but at $158.50 per share it is still trading 13.3% below its 52-week high of $182.89 from June 2024. Investors who bought $1,000 worth of Broadcom’s shares 5 years ago would now be looking at an investment worth $5,319.
