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Chapter 1: What caused Broadcom's stock to drop nearly 15%?
We've got Broadcom stock whiplash today on Motley Fool and Gems Investor. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime pool 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 stocks 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 I
By all objective metrics, all the numbers looked good. 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 heading into earnings. When you get that sort of expectations, any slight hiccup, any slight sneeze can set you back 15%. 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 i don't know it's it's it's kind of hard to look at these and say yeah we should definitely be dropping the stock by 15 because that's just what we do these days yeah and it's not only broadcom a crowd strike also reported we're getting all the reports from companies that use weird fiscal years and uh and some of them haven't been too impressive uh 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.
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Chapter 2: How do expectations influence stock market reactions?
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.
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 was almost like 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 a 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 and
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...
It was going to be chips. Right. 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 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. It's
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.
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Chapter 3: What are the implications of AI semiconductor revenue growth?
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. 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 it. They raised $65 billion. OpenAI 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 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.
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 the narrative of the sectors that they're in. We'll hit that after the break.
I've been wanting to do a story about cartel presence in the U.S. We started with a murder investigation of this woman who was tortured, and they cut off her fingers and then eventually killed her. And she was killed by the cartel, and it was in the middle of nowhere in Georgia.
And then we followed the investigation and, yeah, realized that they're everywhere and particularly like to operate in small-town America. If you want to hear how cartels hide in plain sight, check out episode 1302 of The Jordan Harbinger Show.
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 a 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
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Chapter 4: Which sectors are showing surprising stock performance?
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. 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. 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 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.
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Chapter 5: How will upcoming IPOs impact the stock market?
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.
Chapter 6: What are the potential effects of SpaceX and OpenAI IPOs on ETFs?
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. 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. I just did FFO funds from operations, which is like the real estate version of earnings grew by 19% year over year where 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.
Chapter 7: How can investors adjust their portfolios for upcoming IPOs?
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. 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, you know, year over year. International travel was way down a year ago. Uh, that's coming back a little bit, you know, group events are, are a very resilient part of the hotel market. So yeah, you bring up, bring up a really good point.
I wouldn't really want to invest in a, a leisure hotel operator with, with macro uncertainty, but one that has that group focus business, which is more than half of Ryman's business, uh, 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.
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Chapter 8: What strategies should investors consider in a volatile market?
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 out. 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%. 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 split out a couple other units to just focus on one thing and being good at one thing. 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 XPO has elevated itself to that level.
Similar follow-up, and 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 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 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?
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