Three Mondays ago, semiconductor stocks fell in unison after chip designer Broadcom (NYSE: AVGO) disappointed the stock market with its revenue guidance.
The rout stretched across all sectors of the industry.
Casualties include Taiwanese chip manufacturer Taiwan Semiconductor Manufacturing Company (NYSE: TSM), Japanese equipment makers Advantest (TSE: 6857) and Tokyo Electron (TSE: 8035) along with Korean chip makers SK Hynix (KRX: 000660) and Samsung Electronics (KRX: 005930).
What is happening here?
That’s the question I got on MoneyFM 89.3 recently — and here’s my answer.
Guidance doesn’t miss estimates, estimates miss guidance
First, let’s address the hullabaloo over Broadcom’s missed revenue guidance.
The US-based firm forecasted US$14 billion in revenue for its fourth quarter ending 3 November 2024 (4Q’FY24).
And what are analysts’ estimates?
It’s US$14.13 billion.
Now, take a moment to look at these two numbers again. We’re talking about a purported miss of less than 1% here.
How this tiny difference is worthy of a reaction is beyond me.
Furthermore, if anyone had taken a few minutes to read about its guidance, you would have found the remarks to be positive, and not negative.
In particular, Broadcom is seeing strong demand for artificial intelligence (AI) related revenue, prompting the company to increase its guidance for AI revenue from US$11 billion previously to US$12 billion in FY24.
Compare this US$1 billion increase in AI revenue guidance against the US$0.13 billion guidance miss.
That’s not all.
Broadcom is seeing its non-AI revenue reaching the bottom, on aggregate, and is expecting a recovery from this sales segment in the current quarter (4Q’FY4).
Again, the news here is positive.
If you take a step back and consider the overarching situation here, you will find a business which is doing well but its stock price is going down.
This unique combo — in my eyes, is the formula for the best buying opportunity in the stock market.
Now, to be clear, this is not a call to buy Broadcom shares today.
There is more to learn before you should even consider adding shares to your portfolio.
When share prices are disconnected from the business
When it comes to investing, no one can give you a 100% guarantee that a stock will rise in the future.
That said, you can tilt the odds in your favour.
And how do you do that?
The sequence above provides a hint: instead of casting your net into the wide sea to look for opportunities, you learn how to recognise “patterns of success” which can increase your chances of obtaining a favourable investment outcome.
One such situation is just what we described above.
We’ll say it again: when a business is doing well and the stock falls, you should start to pay attention.
To be sure, it’s not a buy straightaway.
Like any diligent investor, you should always do your homework before you buy a stock.
Remember, buy the stock because you want to own the underlying business. Don’t buy just because the stock price is falling.
Get Smart: When long-term thinking meets short-term volatility
When it comes to new technology such as Generative AI (GenAI), people often overestimate what can be achieved in the short term but underestimate what can be done in the long term.
That’s why at the Smart Investor, we are advocates of investing for the long term.
As it stands, there is plenty of interest in GenAI, judging from the comments from the leaders at NVIDIA (NASDAQ: NVDA) at a recent Goldman Sachs tech conference, and from Oracle (NASDAQ: ORCL) at its analyst day.
In so many words, NVIDIA is producing its newest GPU version, Blackwell, as fast as it can while customers such as Oracle are “begging” for more.
Now, in case you think that’s hyperbole — it’s not.
Oracle founder Larry Ellison shared a dinner table with Tesla (NASDAQ: TSLA) CEO Elon Musk and NVIDIA CEO Jensen Huang and Ellison jokingly said that he was competing with Elon Musk to beg Jensen Huang for more GPUs.
Sure, it’s said in jest, but there is a kernel of truth behind this story.
Dive into the future of technology with our newest FREE report, “The Rise of Titans.” Discover how the big 7 US tech stocks can be your ticket to huge long-term gains. Download your copy today and see how easy it is to supercharge your portfolio.
Follow us on Facebook and Telegram for the latest investing news and analyses!
Disclosure: Chin Hui Leong does not own any of the shares mentioned.
