Portfolio Update
Today confirms it. The market can still print red days. We seem to be reacting negatively to the job reports coming in stronger than expected. The market is probably using this data point to look one step further — namely towards the increasing possibility of rate hikes which wouldn’t be good for high beta names. The market also reacted negatively to Broadcom’s earnings report. Even though the earnings report looked impressive, it didn’t meet the markets expectations seemingly for these 3 reasons.
Hock Tan didn't raise the $100B AI guidance
Tan said the company would offer "chips only," instead of the complete integrated AI systems Broadcom had previously said it would provide to customers. This was read as a scope reduction.
Gross margin slipped to 77.1% and guides to approximately 74% next quarter, as lower-margin AI chips dilute the blended profit on every sale. ASICs are custom, high-volume, but thinner margin than Broadcom's legacy networking and software businesses. As AI revenue becomes a larger share of the mix, it's dragging blended margins down even as absolute profits grow.
A market lull is expected at some point. Maybe we have begun one now as we enter the summer. With today’s reaction, it feels like the market has been waiting for any reason to justify going red for a bit. However, I’m not worried about a “top” in the fashion that a lot of the doomers on TV are talking about it. Structurally the AI buildout looks intact to me.
But it still made sense for me to reduce names I have less passion for — in favor of some of my highest conviction positions. If we do enter a summer lull for example, I would sleep better knowing I made this tiny portfolio tweak: