Broadcom CEO Hock Tan Echoes Warren Buffett in Warning About “Casino”-Like Investing

It pays to listen to anything Warren Buffett or Hock Tan, CEO of Broadcom (AVGO -1.89%), says about the state of the market, but when they say it together, you can be confident that there’s a lot of truth behind it.

Last May, Warren Buffett likened the current market to gambling in a CNBC interview, saying it was like “a church with a casino attached,” and he followed up in July, saying, “It’s tough to find values when everybody is preferring gambling.”

This week, Tan echoed that at an event in Singapore. “A lot of investors have no clue what they are investing in,” he said, according to Bloomberg, and they “set very extreme expectations only to find out that it’s almost like they are in a casino.”

Here’s why they’re concerned, and what you can do today.

Is there an AI bubble?

Concerns are rising as the stock market continues to advance, driven by AI stocks and confidence in private companies like OpenAI and Anthropic. There’s a buoyant feeling about the future of the technology, but spending is reaching $1 trillion according to many estimates, and the confidence is based on expected earnings that don’t exist today.

Tan noted that OpenAI has a $50 billion run rate, which would seem to be a viable business, but it hasn’t figured out how to turn that into earnings. For now, it’s spending a lot of money on training, and many users are short-term; to become a real business, Tan says it needs to find clients who will become long-term revenue streams.

“When you are a kid, you go to a video arcade, you play. Your parents give you $10 of tokens, you finish it in 10 minutes, and you haven’t learned anything,” Tan noted. “That’s what’s happening in enterprises today.”

While these companies are trying to become profitable, they’re spending ever-increasing amounts of money. Eventually, those sources could dry up, and if they haven’t figured out how to turn a profit before that, their businesses could implode.

Over-confident investors

Not all AI stocks are astronomically expensive, and many are highly profitable. Broadcom stock trades at a P/E ratio of 45, which is well below its five-year average of 60, and looks attractive for a fast-growing chip stock. Broadcom has a gross margin of 67% and an operating margin of 54%. It’s a major AI player, providing high-speed networking equipment and custom AI accelerators, but it has a diversified business and revenue streams.

However, investors poured into the Space Exploration Technologies (SPCX -3.61%) initial public offering (IPO), and that stock trades at 68 times trailing-12-month sales despite being unprofitable. (Elon Musk responded to Tan’s warning saying, “No crying in the casino.”) Anthropic, maker of the Claude AI model, has a $65 billion run rate as of July. It’s expected to go public in November, and according to reports, it’s aiming for a $2 trillion valuation.

Companies like Amazon and Alphabet have been disappointing investors with their rising capital expenditure (capex) figures, claiming that they need to invest today to stay competitive and be ready for a future windfall. Both are reporting negative free cash flow as their capex skyrockets.

AMZN Free Cash Flow (Quarterly) data by YCharts

What you can do today

There’s no way to know what will happen next or when the situation might change, but I wouldn’t ignore Buffett’s and Tan’s warnings. If you are highly exposed to AI, it might be time to trade some of your positions for more defensive stocks.

And if you’re still buying, I’d lean toward stocks like Broadcom that are highly profitable and have businesses beyond AI.