Broadcom delivered a massive quarter, but Wall Street punished the stock anyway. The lesson: when perfection is priced in, excellence can still disappoint.
KEY TAKEAWAYS
Broadcom reported a very strong quarter, with revenue up 48%, AI chip revenue up 143%, and more than $10 billion in free cash flow. The stock still sold off sharply because the market had already priced in something beyond excellent.
The reaction was less about Broadcom’s current numbers and more about expectations. When a stock runs roughly 90% in a year and crosses a $2 trillion market cap, even great results can feel underwhelming.
The AI guidance was still powerful, but it fell short of lofty whisper expectations. Wall Street wanted a raised full-year AI forecast, not a maintained one.
The software business and Hock Tan’s shift toward “chips only” narrowed the story. The numbers got bigger, but the narrative got smaller.
The broader lesson is that the AI story is real, but the road will not be straight. Long-term investors need patience, because great destinations do not eliminate short-term air pockets.
MY HOT TAKES
Broadcom did not have a bad quarter; the stock had a bad setup. That distinction matters because confusing the two is how investors sell great companies for the wrong reason.
The AI trade is entering a more mature phase where story quality matters as much as revenue growth. The market is no longer paying endlessly for “AI” stamped on the box. 👀
Whisper numbers are Wall Street’s most annoying magic trick. Nobody admits where they came from, but everyone acts shocked when companies miss them.
The selloff is a valuation lesson, not an AI obituary. Demand is real, spending is real, and the opportunity remains massive–but prices can still run ahead of reality.
Patience is one of the few real edges investors have. The people who make money over decades are usually the ones who resist the urge to chase what already happened.
You can quote me: “The AI era is coming, and it’s going to be bigger than most of us can picture. Just don’t let anyone talk you into believing you have to get there all at once.”
Super-high hopes. After yesterday’s bell, Broadcom printed one of the prettiest quarters I’ve seen cross the tape in my decades on this beat–revenue up 48%, AI chips up 143%, margins fat enough to make even a software company blush, and the market thanked them by knocking double digits off the stock before I took the first sip of my evening tea. That guy who sits next to me on my morning ferry ride across the Hudson–WHILE YOU’RE STILL SLEEPING–texted me one word minutes after the announcement: “Blowout.” He was right. By the time the after-hours dust settled, the stock was down about 13% and his text had aged like milk left out in the hot summer sun. 😋
Here’s the thing none of the morning shows will say in plain English: this was not a bad quarter. It was a great quarter that committed the one recently minted, unforgivable sin on Wall Street–it failed to clear a bar the market had set somewhere up in the clouds. When a stock is priced for perfection, “merely excellent” lands as a disappointment. To be clear, it’s not a Broadcom problem. It’s an everybody problem, and it’s worth understanding before the rest of the AI trade learns the same lesson the hard way.
You will see the Broadcom headlines while you drink your coffee this morning, but I want to offer you some guidance on how to look at them. What the headlines will gloss over is the part that should have mattered more–the windshield, not the rearview mirror. Management guided next quarter to $29.4 billion in revenue, roughly an 84% growth, with the AI line set to roughly triple to $16 billion. The company threw off better than $10 billion in free cash flow in a single quarter. My friends, that is GOAT-status stuff. And it did all of that after the stock had already run up something like 90% over the past year and waltzed clean past two trillion dollars in market value on its way into yesterday’s print. So let me set the table plainly: a company accelerating, gushing cash, and guiding to its best growth in years. On any normal day, in any normal decade I’ve lived through, that’s a stock that opens up 10% and the CEO takes a televised victory lap.
Instead it got marched straight to the woodshed. So what’s the crime? Three things, and none of them are what the headlines will read. First, that $16 billion AI guide came in about 7% shy of what the Street had quietly penciled in. A business growing a hundred and 143% “missed” against a whisper number nobody outside the Wall Street insiders had ever heard of, and that was enough. Second, management held the full-year AI forecast right where it was instead of raising it, and in a market this caffeinated, “maintained” is a four-letter word. The crowd these days doesn’t want good. It wants better-every-ninety-days, forever. And finally, third–and this is the one I’d circle in red–the software line came up light, and CEO Hock Tan quietly told everyone the company would sell “chips only” now, rather than the complete integrated AI systems he’d been promising not so long ago. But that’s the tell. The numbers got bigger while the story got smaller, and the market, for once, was actually listening to the story. Stories have been important drivers in the past few weeks–for what that’s worth, and Tan came up short. 😕
Here’s an interesting point that might have escaped most folks, the one buried under all the “is-the-AI-bubble-popping” chatter. Leading up to yesterday’s close, the options market was pricing in a roughly 17% percent move in either direction the day after earnings versus a historical average closer to 11%. Translate that out of trader-speak: the people putting real money on the line knew this was a coin flip. So when the stock dropped in the post-market, it wasn’t a thunderbolt out of a clear blue sky. It was the precise outcome the smartest money in the building had already paid up to protect against. You just weren’t supposed to notice.
Remember my old tattered Wall Street Sayings notebook? There is a page that fits this morning like a glove: buy the rumor, sell the news. Everybody bought the rumor on the 99% ride up. Yesterday afternoon they sold the news, and it didn’t matter one bit that the news happened to be spectacular. By the time it arrived, it was already in the price three times over.
So let me pull the lens back, because Broadcom on its own isn’t really the story–it’s a symptom. What we’re watching is what happens when a market moves too far, too fast, and leaves behind the ground it was supposed to be standing on. Look at the backdrop. The economy has been running flat-ish for months now–not falling apart, but not sprinting either. Growth is tepid, hiring has gone quiet, and the consumer is stretched thinner than the headlines admit. Layer on a geopolitical situation that keeps ratcheting tighter–Iran, the Strait of Hormuz, crude clawing its way back toward triple digits–and you have a setup that argues for caution. And yet the market has done the opposite, flying from record to record as if none of it existed.
I’ve been clear on this–divergence like that doesn’t last forever. When prices race out ahead of the fundamentals beneath them, the gap gets reconciled one way or the other–either the fundamentals rise up to meet the prices, or the prices come back down to meet reality. There’s no third door where the two simply agree to stay apart. Broadcom, in its small way, was reality knocking. A spectacular company priced as if spectacular were the floor rather than the ceiling–and the instant it delivered merely spectacular, the air came out.
To be really clear, I am not telling you the AI story is a mirage. It isn’t. The demand is real, the spending is real, and the long-term growth ahead of these companies is genuinely enormous–larger, I’d argue, than most people are willing to underwrite. The valuations, properly understood, are not crazy. But too much, too soon is simply not a healthy way for anything to grow–not a child, not a company, not a market.
Compounding is a patient person’s game. The investors who capture the AI decade won’t be the ones who chased the last leg of a 90% year and got carried out the first time a great quarter wasn’t great enough. They’ll be the ones who stayed long-term oriented and let the story breathe–who understood that a real destination doesn’t guarantee a straight road.
Which brings me back to my friend on the ferry and his one-word text. “Blowout.” He wasn’t wrong about the company–he was wrong about what good buys you when the market has already priced in great, and then some. By the time I finished my tea, the lesson had written itself, the same one I keep coming back to after all these years: the market always wants to arrive faster than it should, and patience is the toll you pay for the part of the story that actually rewards you. The AI era is coming, and it’s going to be bigger than most of us can picture. Just don’t let anyone talk you into believing you have to get there all at once.
YESTERDAY’S MARKETS
Yesterday, stocks fell as renewed US-Iran tensions pushed oil and Treasury yields higher, snapping the S&P 500's 9-day winning streak. The S&P 500 shed 0.74%, the Nasdaq fell 0.89%, and the Dow dropped 620 points, or 1.21%, to 50,687.07. West Texas Intermediate crude settled up 2.41% at $96 a barrel, while Brent gained 1.89% to $97–both still below $100.
NEXT UP
Initial Jobless Claims (May 30) is expected to come in at 215k, same as the last week.
Busy Fed-speak day: Barkin, Bowman, Daly, and Schmid.
Important earnings today: Brown-Dorman, Ciena, Samsara, Planet Labs, Docusign, Rubrik, and Guidewire.