Broadcom’s Stock Whiplash

0:01Tyler Crowe:We've got Broadcom stock whiplash today on Motley Fool Hidden Gems Investing.

0:09Tyler Crowe: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 it'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.

0:39Tyler Crowe:But by all objective metrics, all the numbers looked good. The guidance looked fine. Is this really just expectations game, Lou?

0:48Lou Whiteman:Yeah, I think it is. Expectations are everything, right? It's glass half full, glass empty. The stock is up 15 % just heading 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 OK to me.

1:18Tyler Crowe: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 definitely be dropping the stock by 15 percent 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.

1:55The 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 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.

2:28Tyler Crowe:Yeah, we certainly did see a lot of blowouts this most recent quarter, looking at a lot of these suppliers, Taiwan Semi, basically everyone was like, everything is awesome. With Broadcom's numbers looking pretty good. It's almost, it was almost like a comparing to everyone else. It's like, well, they were that good. Can you do as well? And this kind of touches on a couple top themes and topics we've discussed so far during this week. Like when you and the three of us were on the show on Tuesday, we were talking about like, how much does narrative play into your thesis? And narrative kind of is also valuation based.

3:06Tyler Crowe: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? And then it became memory chips.

3:46Tyler Crowe: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 % stock drop. Yeah.

4:06Lou Whiteman: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 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 there should be a warning sign to you that nothing is good enough.

4:48Lou Whiteman:So look out below. Specific to Broadcom, look, there are massive expectations still up ahead. CEO Huck10 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 that 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, you know, about potential fragility. And it kind of scares me. You add in the fact that, you know, OpenAI and Anthropic are going to account for a lot of that growth. Those are two very different companies right now.

5:25Lou Whiteman: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 is a good company. But right now, I just it's just hard to look at this and say, yes, everything's fine. Everything is 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 percent. 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.

6:03To Lou's point, the expectations are huge here. You mentioned they're predicting about$100 billion of AI revenue in 2027. About$40 billion of that, a little more, is expected to come from Anthropic alone. OpenAI is a big client. So, I mean, the Anthropic and OpenAI 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. OpenAI raised$120 billion recently. That's not going to be enough for all of their commitments.

6:38So these IPOs really need to go well. They need to get strong valuations. It's, you know, the OpenAI 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 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.

7:01Tyler Crowe: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 of the sector that they're in. We'll hit that after the break.

7:39Lou Whiteman:Summer always changes how I get dressed. I want pieces that feel lighter and more breathable, things that are easy but still put together. That's why I keep coming back to Quintz. They focus on high-quality essentials that feel and look amazing. Think breathable linen and soft organic cotton. Well-made basics but without the luxury markup. It's that rare balance where everything feels elevated but still effortless. Quintz European linen pants and shirts are perfect warm-weather upgrades to add to your rotation starting at just$34. Their tees are soft and easy to wear, and their lightweight cotton sweaters are perfect for cooler summer nights.

8:16Lou Whiteman:Everything at Quince is priced 50-80 % less than similar brands. They work directly with ethical factories and cut out the middlemen, so you're paying for quality, not brand markup. Quince goes way beyond clothing. Custom upholstered sofas, ceramic cookware, premium bedding. It's the kind of brand you'll end up recommending to everyone for everything. As the summer is heating up, I'm really loving my Flow Knit Breeze Performance tees and my ProTech golf pants. My son is a huge fan of the kids' organic cotton ankle socks. Elevate your summer wardrobe. Go to quince.com slash motley for free shipping on your order and 365-day returns.

8:53Lou Whiteman:Now available in Canada, too. That's quince.com slash motley for free shipping and 365-day returns. quince.com slash motley.

9:03Tyler Crowe: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, retired people, probably not picking individual stocks. You know, 60 % of your money in stocks, 40 % of your money in bonds.

9:45Tyler Crowe: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? 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.

10:23Tyler Crowe:I think insurance, healthcare, 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. 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.

11:06So I'm going to bring up a real estate stock.

11:08Tyler Crowe:That's the whole point of this segment. Right. So I'm going to bring up a real estate stock. So over the past three months, the S &P 500 as a whole has gained about 11%, mostly because of the mega cap tech stocks. Meanwhile, the real estate sector has been almost exactly flat. It was up 0.02 % 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.

11:44It'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, 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.

12:18average 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 real estate version of earnings, grew by 19 % year over year. That's a rapid pace for real estate.

12:47Tyler Crowe: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 years in advance.

13:24So 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 in, you know, year over year. International travel was way down a year ago. That's coming back a little bit. 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, but one that has that group-focused business, which is more than half of Ryman's business, does have a little more visibility.

14:00Tyler Crowe:Lou, I think we're not going to do anything real estate related with what you're looking at here.

14:05Lou Whiteman:No, no, no. I will say though, I'd rather own Ryman than stay at the Grand Ole Opry. So 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. We were coming down from kind of the 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.

14:44Lou Whiteman: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 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.

15:24Lou Whiteman:They shedded unrelated businesses that, you know, 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.

15:53Tyler Crowe:similar follow-up. I mean, this is kind of a discussion you and I, I think we had a couple of years ago too, where it felt like a time where like trucking especially was like, you've got Old Dominion, XPO's 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 XPO is kind of like taking candy from a baby, taking market share here because they couldn't seem to, you know, 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.

16:38Tyler Crowe:With that in mind, with the kind of the outperformers like XPO and Old Dominion that have 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?

16:56Lou Whiteman: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. The other answer is scale. 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 business out there.

17:30Lou Whiteman:XPO is finally trading at a multiple similar to Old Dominion, which you never saw a few years ago. I do think probably the 340 % of the three years that we can't repeat that, that a lot of that was playing 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.

17:56Tyler Crowe: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, 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 that's been quite lousy this year and so far 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.

18:39Tyler Crowe:You're also seeing a lot of pricing pressure on the big lines of insurance that we see, like automotive and home owners, 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. You know, rising costs are getting hard to 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.

19:17Tyler Crowe: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 O-S-C-R. 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 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.

19:56Tyler Crowe: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 employees, excuse me, while giving them more options. And actually 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, Obama quite care 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.

20:30Tyler Crowe: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 ratios, 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 or anything like that relative to the premium bring in.