Artificial intelligence semiconductor giant Broadcom (AVGO 2.47%) saw its share price plummet after reporting second-quarter earnings for fiscal year 2026 that missed Wall Street's expectations.
It also triggered a major market rotation, as investors sold tech and piled into sectors like banking and healthcare. Broadcom actually generated pretty strong earnings results. But when expectations are sky-high, companies must surpass them if they want their stock to rise.
Did Broadcom's lackluster quarter show a crack in the AI trade? I don't know if I'd go that far, but I think it offers an important lesson to investors.
Image source: Getty Images.
Results were good, but not good enough
It's been a stellar quarter for AI chip and component companies, most of whom have been blowing out earnings, prompting analysts to raise forward estimates. Chip stocks have been on an incredible run over the past two months.
So when it came time for Broadcom to report earnings, expectations were probably even higher than they had been entering the quarter.
Broadcom actually delivered strong results. Net revenue jumped 48% year over year, while diluted earnings per share jumped 85%. However, revenue came up slightly below consensus estimates. Furthermore, the company's revenue guidance in its AI chip business also came up short of estimates.
Broadcom designs custom AI chips that, unlike more general-purpose graphics processing units (GPUs), can run specific types of AI workloads at scale more efficiently. One of Broadcom's key customers has long been Google. There has been some concern among the investor community that Broadcom may be losing some of its share in Google's business.
NASDAQ: AVGO
Key Data Points
"Now, we also accept the fact that while we like to win every design in that program, we also accept the fact that given the rate the growth of consumption of and development and consumption of AI compute by our partner Google, that we fully expect that there will be some diversity of sources for them. But our commitment from them is a very substantial dollar amount," Broadcom's CEO Hock Tan told analysts on the company's conference call.
The lesson for investors
Even after this recent sell-off, Broadcom, a $1.83 trillion market cap company (as of June 7), is still up 59% in the past year. Its quarterly results were still pretty good, and the company will continue to play a big role in the AI chip space.
But on the day after Broadcom's results, the Nasdaq Composite ended roughly flat, while the Dow Jones Industrial Average added 875 points. The rally was led by banks and healthcare stocks.
The big rally in the Dow also stemmed from news about the Iran war, but rotation was definitely a theme throughout the day. Investors may have seen Broadcom's results and gotten too nervous about being overly concentrated in large AI and tech, thereby choosing to diversify.
Again, Broadcom's results weren't bad, and I don't think this is the end of the AI trade or even necessarily a crack in it.
However, I see it as an important lesson for investors because it shows how temperamental the market can be. If a small miss on earnings and guidance by Broadcom triggered a sell-off in other AI and tech names, what would happen if something really went wrong?
I don't think anyone is going to be able to call the end of the AI trade or even predict what, if anything, will make it pause. However, as the market becomes more concentrated and trades at elevated valuations, I do think investors should be prepared for it to take more of a risk-off stance toward the big AI names.
Long-term investors don't necessarily need to change their portfolios, but if your portfolio is invested in highly valued AI stocks and you are worried about capital preservation over the next year or two, then it's time to consider taking some profits or diversifying into other sectors.
