Thanks to another strong showing for its second-quarter earnings report, semiconductor giant Broadcom Inc. AVGO has been one of the strongest performers among major publicly traded tech firms. On a year-to-date basis, AVGO stock has gained nearly 19%. Since the close of April 4, however, the security has nearly doubled in value. Still, with so much good news baked in, pessimists counter that AVGO carries too rich a premium.
Last month, Broadcom reported second-quarter revenue of $15 billion, beating Wall Street’s expectation of $14.99 billion. On the bottom line, the tech stalwart posted adjusted earnings of $1.58 per share, exceeding the consensus view of $1.56 per share.
Notably, total revenue was up 20% on a year-over-year basis, with continued momentum in semiconductor solutions in artificial intelligence and its VMware acquisition contributing the bulk of the performance spike. Furthermore, Broadcom generated approximately $6.56 billion in cash from operations and $6.41 billion in free cash flow during the quarter, reflecting robust profitability and high operational efficiency.
Given that Broadcom is a major supplier of AI infrastructure — particularly custom AI accelerators for hyperscale data centers — the tech juggernaut theoretically stands on fertile ground. According to a McKinsey & Company report, U.S. data center demand could grow by approximately 10% a year until 2030. Furthermore, Morgan Stanley estimates that total generative AI revenue could exceed $1.1 trillion by 2028, indicating a potentially compelling backdrop.
Despite AVGO stock rising on much-deserved accolades, success in the market also tends to attract skepticism. For the bears, heightened (possibly excessive) valuations represent one of the key concerns. Right now, AVGO trades at over 100 times trailing-12-month earnings, a figure that has jumped from 89.11 times back on April 30 of this year.
To be fair, financial ratios are derived from non-stationary continuous scalar signals and must be taken as part of a broader context. Nevertheless, investors frequently monitor these ratios and may be tempted to rotate their profits into perceived discounted value plays.
Another risk centers on the core business itself. Currently, Broadcom’s custom AI accelerators — known as application-specific integrated circuits (ASICs) — are highly demanded because they serve specific workloads. However, by their very nature, ASICs cannot be reprogrammed to serve other purposes. Therefore, if customer needs evolve, Broadcom potentially faces obsolescence risks.
The Direxion ETFs: With sensible arguments on both sides of the table, traders interested in speculating on AVGO stock potentially have ample opportunities to do so. That’s where financial services provider Direxion comes into the picture, providing specialized exchange-traded funds for that very purpose.
Those believing that Broadcom’s trajectory will be positive may consider the Direxion Daily AVGO Bull 2X Shares AVL, which seeks 200% of the daily performance of AVGO stock. On the other end, the Direxion Daily AVGO Bear 1X Shares AVS seeks 100% of the inverse performance of the namesake security.
In both cases, the main purpose behind these specialized ETFs is to provide a convenient form of speculation. Typically, those interested in leverage or short positions must engage the options market. However, derivatives carry unique complexities that not all investors may wish to deal with. On the flipside, Direxion ETFs can be bought and sold like any other publicly traded security, thus mitigating the learning curve.
Still, prospective participants must be aware that leveraged and inverse ETFs carry certain risks. Primarily, these products tend to be more volatile than standard funds that track benchmark indices like the S&P 500. In addition, Direxion ETFs are designed for exposure lasting no longer than one day. Holding such products beyond the recommended period may lead to value decay from daily compounding.
The AVL ETF: While the AVL ETF got off to an inauspicious start to the new year, it has rebounded tremendously since April, leading to a year-to-date gain of nearly 11%.
- The 2X bull fund is trading above both its 20-day exponential moving average and the 50 DMA, indicating robust demand.
- Still, one area to watch out for is volume. Since June 11, acquisition volume has declined as the price increased, raising concerns of a possible correction.
The AVS ETF: Although the AVS ETF started off the year on a strong foot, the inverse fund began declining in early April, leading to a year-to-date decline of almost 28%.
- On the other end of the table, the AVS ETF is trading conspicuously below its 20-day EMA and 50 DMA, suggesting heightened bearishness.
- It’s possible that the velocity of bearishness has declined since late last month, possibly opening the door to a sentiment reversal.
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