1 AI Stock To Avoid In 2024

The story and hype around artificial intelligence drove a whole wave of technology stocks higher in 2023. Some of the gains were well-deserved and others, like Broadcom, might have mushroomed to unsustainable levels for 2024.

We took a peek at the financials to see if the current valuation matches with the price and, candidly, what we discovered surprised us. If you’re looking for an opportunity on the short side next year, this might be it, but there are few things to watch out for first.

Key Points

• Broadcom has been on fire in 2023, rising by 107% year-to-date but technical signs point to it being overbought.
• A fundamental analysis also reveals that it is trading well above fair value at this time.
• On a break below bullish support, the downside could be ugly and fast, leading to an opportunity for bears.

Broadcom Financials Paint an Ugly Picture

Before getting to the major flaw in the bulls investment thesis, we need to point out the many positives for AVGO.

First, the company has been producing high quality earnings with free cash flows well above net income. Indeed, profitability has been very impressive with earnings per share consistently increasing in recent quarters.

The dividend is a thing of beauty too, consecutively rising for 14 years straight and now sitting at 1.86%.

Furthering the bulls case is the expectation among analysts that the top line will increase this year. So what’s the concern? Is the balance sheet brittle? No. The numbers look good with $14.1 billion in cash, though admittedly $37.6 billion in long-term debt is a little off-putting given where interest rates stand.

So, what’s the bear case?

3 Reasons To Steer Clear of Broadcom

The first and primary reason to be skeptical of Broadcom is its current valuation. Analysts see 7.1% downside risk to fair value right now though we think that’s being optimistic. By our calculations, the intrinsic value for the firm stands closer to $930 per share, suggesting almost 19% downside risk right now.

That valuation is confirmed by the price-to-earnings multiple, which is very elevated based on historic norms. Broadcom’s P/E ratio now sits at 38.1x, a sky high level.

And finally, on a technical level, Broadcom appears very overbought on its relative strength index line, or RSI.

Final Thoughts

If we know anything about the market, it is that momentum can continue for longer than seems rational. And so Broadcom isn’t a stock to bet against right away while the price trend is in favor of the bulls. But the more the stock rises, the more risk to the downside when the bullish trend is broken, and then the flood gates will likely open, perhaps as soon as mid-late January.

For bears, wait for the bullish support line going back almost a full year to be broken for confirmation that a new trend change is taking effect. The play could then be to consider longer term puts far out in time to avoid the worst of the theta decay that affects shorter term options.