What Are The Risks Threatening AVGO Stock’s Run?

Posted By:
view original post

Broadcom stock (NASDAQ: AVGO) has had a rocky start to the year, with its stock currently down 4%. Despite a period of record-breaking demand for its AI-related hardware, the company is struggling against two primary headwinds: cooling investor sentiment and growing skepticism regarding long-term profitability.

To better understand this volatility, it is helpful to look at the stock’s historical performance and recent market behavior:

While Broadcom is a leader in the semiconductor space, its history shows that it is not immune to sharp declines. Investors should note the following patterns:

  • Significant Drawdowns: On two separate occasions in recent years, the stock plummeted by more than 30% in less than two months.
  • Market Impact: These rapid corrections resulted in the loss of billions in market capitalization, effectively erasing months of substantial gains in a matter of weeks.

If past performance serves as a guide, Broadcom remains susceptible to abrupt and severe downturns. While the AI boom provides a strong fundamental floor, the stock’s historical tendency for sharp reversals suggests that current investors should remain wary of potential “air pockets” in valuation.

In particular, we identify the following risks:

  1. VMware Post-Acquisition Customer Revolt
  2. AI-Driven Margin Compression
  3. Geopolitical Retaliation and Tariff Challenges

Risk 1: VMware Post-Acquisition Customer Revolt

  • Details: Projected decline in market share from 70% to 40% by 2029 (Gartner); Loss of high-margin recurring software revenue as businesses exit
  • Segment Affected: Infrastructure Software
  • Potential Timeline: Next 12-24 months
  • Evidence: Customers reporting mandatory subscription bundling and 800%-1,500% price hikes; Tesco initiates £100m lawsuit claiming contract breach; European cloud providers (CISPE) seeking to annul EU merger approval.

Risk 2: AI-Driven Margin Compression

  • Details: Sequential decline in gross margins as indicated by management; Adjusted EBITDA margin guidance suggesting a drop to 67%.
  • Segment Affected: Semiconductor Solutions
  • Potential Timeline: Immediate – Q1 2026 Earnings Report
  • Evidence: Rapid growth in lower-margin custom AI chips (XPUs) diminishing overall profitability; Management explicitly projected margin reductions due to increased XPU mix; Rising memory chip prices causing unforeseen cost pressures against guidance.

MORE FOR YOU

Risk 3: Geopolitical Retaliation and Tariff Challenges

  • Details: Possible loss of a significant fraction of 17% revenue dependency from China; Margin pressure on AI chips from new 25% U.S. tariffs
  • Segment Affected: Infrastructure Software, Semiconductor Solutions
  • Potential Timeline: Immediate to Q2 2026
  • Evidence: China issues directive to phase out foreign software, including VMware, from state-owned enterprises by mid-2026; U.S. implements 25% tariff on advanced AI chip exports to China; Stock dropped 4.2% immediately after China’s software ban announcement.

What Is The Worst That Could Happen?

Evaluating AVGO, it is evident that risk is tangible despite the positives. The stock declined approximately 27% during the 2018 correction, nearly 48% during the Covid crash, and around 35% in the recent inflation scare. Even robust stocks like AVGO can experience dramatic declines in challenging markets.

However, stocks can drop even in favorable markets – consider events such as earnings reports, business updates, and outlook modifications. Refer to AVGO Dip Buyer Analyses to understand how the stock has bounced back from significant drops in the past.

  • Revenue Growth: 23.9% LTM and 25.2% last 3-year average.
  • Cash Generation: Nearly 42.1% free cash flow margin and 40.8% operating margin LTM.
  • Valuation: Broadcom stock is trading at a P/E multiple of 68.0

*LTM: Last Twelve Months

For further details, check Buy or Sell AVGO Stock.

Portfolios Outperform Stock Picking

Individual stocks can fluctuate dramatically, but remaining invested is crucial. A well-structured portfolio enables you to stay invested, harness potential gains, and mitigate the impacts from specific stocks.

The Trefis High Quality (HQ) Portfolio, featuring a set of 30 stocks, boasts a history of comfortably outperforming its benchmark, which includes all three – the S&P 500, S&P mid-cap, and Russell 2000 indices. What accounts for this? The HQ Portfolio has achieved over 105% in cumulative returns since its inception, with lower risk in comparison to the benchmark index, as reflected in HQ Portfolio performance metrics.