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Broadcom Earnings: Will AI Revenue Spark Gains or Byte-Sized Losses?

Xchange NewsletterDecember 03, 2024 | 4 min read
A glowing green brain surrounded by walls of mainframe hardware

Editor’s note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don’t have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.

Investing in the funds involves a high degree of risk. Unlike traditional ETFs, or even other leveraged and/or inverse ETFs, these leveraged and/or inverse single-stock ETFs track the price of a single stock rather than an index, eliminating the benefits of diversification. Leveraged and inverse ETFs pursue daily leveraged investment objectives, which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying stock’s performance over periods longer than one day. They are not suitable for all investors and should be utilized only by investors who understand leverage risk and who actively manage their investments. The Funds will lose money if the underlying stock’s performance is flat, and it is possible that the Bull Fund will lose money even if the underlying stock’s performance increases, and the Bear Fund will lose money even if the underlying stock’s performance decreases, over a period longer than a single day. Investing in the Funds is not equivalent to investing directly in AVGO.

As one of the world’s largest and most important chip manufacturers, Broadcom Inc.’s (Ticker: AVGO) upcoming earnings report in early December could set the pace for the stock and the closely watched semiconductor sector.

Although NVDIA Corporation (Ticker: NVDA) gets a lot of attention in semiconductors with good reason, Broadcom has also been riding the artificial intelligence (AI) wave. Broadcom is a leader in the wireless chip and networking businesses, and counts some of the world’s biggest tech companies among its customers. The stock has doubled in the past year and executed a 10-for-1 stock split in July 2024. In other words, it has been a nice ride lately.

When Broadcom released its last quarterly earnings report in early September, though, the stock initially gapped down on the results. However, that sell-off marked a recent bottom in the stock, which is above its 50-day moving average* in the wake of the U.S. presidential election.

Below is a daily chart of AVGO, as of November 6, 2024.

Daily chart of AVGO as of November 6, 2024.

Source: StockCharts.com, November 6, 2024.

Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.

The performance data quoted represents past performance. Past performance does not guarantee future results.

What to Watch in AVGO’s Upcoming Earnings Report

Broadcom is expected to announce fiscal fourth-quarter earnings on or around December 6. The consensus Wall Street analyst estimate is for quarterly net income of $1.39 a share, up from $1.11 a share in the year-ago period, according to TipRanks.

This projection is buoyed by increased demand for custom chips and Ethernet networking used in AI data centers. Any updates on the company’s quarterly AI sales and projections, particularly with potential announcements about new customers like OpenAI, the company behind ChatGPT, could heavily influence market sentiment. According to media reports, OpenAI is working with Broadcom to develop a new chip specifically focused on running AI models after they’ve been trained (TheStreet).

Below are three key catalysts traders should watch closely when Broadcom announces quarterly results in early December.

AI Revenue Growth: Broadcom has firmly positioned itself as a significant player in the AI space, forecasting $12 billion in AI-related sales for fiscal 2024, as CNBC reports. Any updates on the company’s quarterly AI sales and projections, particularly with potential announcements about new customers like OpenAI, could heavily influence market sentiment.

  • Bullish Thesis: Should Broadcom meet or exceed its $12 billion AI revenue forecast, it would reinforce investor confidence in its strategic positioning. Such a result could support the narrative of strong, sustainable growth driven by AI adoption and networking solutions, which is expected to continue growing at a 30-35% compound annual growth rate (CAGR), according to analysts at Bank of America (BofA). BofA recently kept its buying rating on Broadcom, pointing to the company’s strength in AI computing and networking, resulting in robust free cash flow generation, Investing.com reports.
  • Bearish Thesis: If AI revenue falls short of expectations, it may trigger a negative response from the market. Concerns could arise about the long-term viability of Broadcom’s AI growth trajectory and its ability to compete with leaders like NVIDIA in a highly competitive sector.

Integration of VMware Acquisition: Broadcom’s $69 billion acquisition of VMware, completed in late 2023, remains a pivotal component of its business strategy. This move aims to diversify its revenue streams and enhance its infrastructure software offerings. Traders will be paying close attention to any progress updates on cost synergies and the integration of VMware’s operations.

  • Bullish Thesis: Clear evidence of successful integration and cost synergies could amplify Broadcom’s growth narrative. If the company demonstrates that VMware’s acquisition is yielding substantial revenue contributions, it would bolster its well-earned reputation for executing complex strategic maneuvers efficiently.
  • Bearish Thesis: On the flip side, integration challenges or slower-than-expected progress could weigh on the stock. Issues such as higher integration costs or delays in achieving synergies may prompt investor skepticism regarding Broadcom’s broader diversification strategy.

Forward Guidance and AI Demand: Broadcom’s forward-looking guidance will be a significant focus. While the company has delivered positive surprises in recent quarters, its commentary on future performance will be critical. This is especially relevant as the semiconductor industry navigates potential seasonal headwinds and shifts in AI demand.

  • Bullish Thesis: A robust guidance outlook, underscoring sustained AI demand and additional opportunities, particularly with new partners like OpenAI, would likely lead to a positive reassessment by analysts and investors.
  • Bearish Thesis: If Broadcom’s guidance hints at a slowdown due to factors like product transitions or macroeconomic pressures, it could signal a shift to more cautious sentiment. This would particularly concern traders if the company underscores volatility in AI shipments or faces headwinds that impact short-term growth prospects.

Trading AVGO on the Bullish or Bearish Sides

Broadcom’s upcoming earnings report carries the potential to act as a significant catalyst for its stock, particularly as traders watch for developments in AI revenue, VMware integration, and forward guidance. While the bullish case focuses on strong AI momentum and strategic acquisitions propelling growth, the bearish scenario raises concerns about execution risks and future demand fluctuations.

For traders bullish on AVGO, the Direxion Daily AVGO Bull 2X Shares (Ticker: AVL) offers a way to amplify exposure. This leveraged ETF seeks daily investment results, before fees and expenses, of 200% of the performance of Broadcom Inc.’s common stock. Conversely, AVGO bears can attempt to take advantage of weakness in the stock with the Direxion Daily AVGO Bear 1X Shares (Ticker: AVS). This inverse ETF seeks daily investment results, before fees and expenses, of 100% of the inverse (or opposite) of the performance of Broadcom Inc.’s common stock.

*Definitions and Index Descriptions

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

The Funds have derived all disclosures contained in this document regarding Broadcom Inc. from publicly available documents. In connection with the offering of each Fund’s securities, neither the Funds, the Trust, nor the Adviser or any of its respective affiliates has participated in the preparation of such documents. Neither the Funds, the Trust nor the Adviser or any of its respective affiliates makes any representation that such publicly available documents or any other publicly available information regarding Broadcom Inc. is accurate or complete. Furthermore, the Funds cannot give any assurance that all events occurring prior to the date hereof (including events that would affect the accuracy or completeness of the publicly available documents described above) that would affect the trading price of Broadcom Inc. have been publicly disclosed. Subsequent disclosure of any such events or the disclosure of or failure to disclose material future events concerning Broadcom Inc. could affect the value of a Fund’s investments with respect to Broadcom Inc. and therefore the value of the Funds.

Direxion Shares Risks – An investment in a Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with a Fund concentrating its investments in a particular security, industry, sector, or geographic region which can result in increased volatility. A Fund’s investments in derivatives such as futures contracts and swaps may pose risks in addition to, and greater than, those associated with directly investing in securities or other investments, including imperfect correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility and lack of availability. As a result, the value of an investment in a Fund may change quickly and without warning.

Leverage Risk – The Bull Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in market conditions that are adverse to its investment objective than a fund that does not utilize leverage. A total loss may occur in a single day. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with AVGO and may increase the volatility of the Bull Fund.

Daily Correlation Risk – A number of factors may affect the Bull Fund’s ability to achieve a high degree of correlation with AVGO and therefore achieve its daily leveraged investment objective. The Bull Fund’s exposure to AVGO is impacted by AVGO’s movement. Because of this, it is unlikely that the Bull Fund will be perfectly exposed to AVGO at the end of each day. The possibility of the Bull Fund being materially over- or under-exposed to AVGO increases on days when AVGO is volatile near the close of the trading day.

Daily Inverse Correlation Risk – A number of factors may affect the Bear Fund’s ability to achieve a high degree of inverse correlation with AVGO and therefore achieve its daily inverse investment objective. The Bear Fund’s exposure to AVGO is impacted by AVGO’s movement. Because of this, it is unlikely that the Bear Fund will be perfectly exposed to AVGO at the end of each day. The possibility of the Bear Fund being materially over- or under-exposed to AVGO increases on days when AVGO is volatile near the close of the trading day.

Broadcom Inc. – AVGO faces risks associated with: the highly competitive nature of the semiconductor industry; failure to realize expected benefits from mergers, acquisitions and other joint ventures; economic and market uncertainty; reduced demand for its products; potential concentration of revenues in a few large clients; geopolitical and economic events and pandemics; among other risks.

Semiconductor Industry Risk – Semiconductor companies may face intense competition, both domestically and internationally, may have limited product lines, markets, financial resources or personnel and may face risks related to the availability of materials.

Technology Sector Risk — The market prices of technology-related securities tend to exhibit a greater degree of market risk and sharp price fluctuations than other types of securities.

Additional risks of each Fund include Effects of Compounding and Market Volatility Risk, Derivatives Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Industry Concentration Risk, Market Risk, Indirect Investment Risk, and Cash Transaction Risk. Additionally, for the Direxion Daily AVGO Bear 1X Shares, Shorting or Inverse Risk. Please see the summary and full prospectuses for a more complete description of these and other risks of a Fund.

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