Everyone knows NVDA, the graphics chip, turned crypto mining chip, turned leader in AI chip design. AVGO is, I think, somewhat less well-known and far less glamorous. It provides hardware and software that connects AI to the rest of the world–and has evolved in large part through acquisition of tech companies thought to have been past their peak. AVGO rejuvenates them. The best comparison I can come up with, admittedly not very good, is they’re like Shohei Otani and the people who manage Dodger Stadium (ex the parking lots).
Both trade at roughly the same PE multiple of year-ahead earnings.
If we look at past performance, the two stack up like this:
NVDA AVGO
5yr +20x +10x
1yr +79% +76%
6mos +10% +49%
1mo -7.4% -4.7%
5days -10.3% -7.7%
What happened?
–My overall thought is that about a half-year ago, the mood of the market changed. Investors went from trying to hit the ball out of the park during every at bat to giving at least some emphasis to pitching and defense.
That is always more important than why, and the reasons for switching from thinking up-market to down-market are always complex. My guess, however, is that Wall Street sensed voters would regard an aging former reality show star (he’s a few months older than me) with an eccentric economic platform intending to achieve growth by shrinking the workforce and starting an international price war as their best choice for president. Contrary to his stated intentions, the market believes, I think, that recession some time in 2025 would be the result.
–NVDA’s operating margin had expanded to a point where future margin increases were highly unlikely–creating the worry that Wall Street would be slow to recognize this, causing a stock selloff when the lightbulb went on, most likely after a disappointing quarterly result. A slow rolling version of this idea may be underway now
–on AVGO’s last earnings call, management indicated it thinks its AI-related sales opportunity is very much larger than the consensus had appreciated.