Shares of semiconductor company Broadcom (AVGO +2.78%) jumped 3.9% through 1:45 p.m. ET Monday on some positive AI news.
According to a report published by The Information late Friday, Microsoft (MSFT +1.48%) -- which has been having Marvell Technology (MRVL 6.99%) build its custom-designed artificial intelligence chips -- is now looking to shop this business to Broadcom instead.
Image source: Getty Images.
Buy the rumor, sell the news
Not everyone is buying the report, however. JPMorgan analyst Harlan Sur, for example, is quoted today insisting Microsoft's contract with Marvell remains "solidly intact," as too is Marvell's similar contract with Amazon.com (AMZN 1.24%). Regardless, investors today are buying the rumor about Broadcom's good fortune -- just in case it turns out The Information was correct.
They're also selling Marvell stock, which is down more than 7%.
NASDAQ: AVGO
Key Data Points
Is Broadcom stock a buy?
Investing in a stock based on an unconfirmed rumor can be dicey. You're basically paying up for earnings that might not actually exist. Before doing this, investors should consider what they'll end up owning if Broadcom does not, in fact, win a big batch of business from Microsoft.
And what they discover might worry them.
Priced north of $1.8 trillion, Broadcom stock sells for a staggering 74 times trailing free cash flow, and an even more nosebleed 97.5 times trailing earnings. And granted, Broadcom is growing fast already, and might grow even faster with new business from Microsoft. As things stand today, though, most analysts have the stock pegged for only about 31% annual long-term earnings growth -- and therefore a PEG ratio of more than 3.0.
All I can say about that is... if Broadcom doesn't end up winning Microsoft's business, the stock is going to look terrifically overpriced.
