The chip trade isn’t in the dumps, but traders are taking a fine tooth comb to earnings guidance to see if the numbers are stacking up with the hype.

Today we got yet another data point that suggests chip stocks are great, but they aren’t living up to the lofty expectations of growth that tech companies are used to.

In short, they are too expensive and investors want a cheaper multiple for chip stocks right here and now.

So be prepared for a little bit of a selloff in the immediate short term.

One of the best second-tier chip stocks and one of Apple's biggest customers gave us a glimpse into operations behind the scenes at one of Silicon Valley’s robust silicon makers.

Broadcom (AVGO) delivered a disappointing sales forecast, hurt by the parts of its business that aren’t tied to artificial intelligence.

The company projected sales of roughly $14 billion in the fourth quarter while they expect $12 billion of revenue from AI-related products for the full year, beating the average estimate of $11.8 billion.

The forecast showed that Broadcom’s non-AI operations are growing more slowly than anticipated. Though the company has benefited from a surge in artificial intelligence spending, not all of its wide-ranging divisions are significantly profiting.

The AI spending boom has turned Broadcom’s rival Nvidia (NVDA) into the richest, most valuable company in the industry. Nvidia sells so-called AI accelerators that help develop tools such as ChatGPT. Broadcom has benefited as well by supplying related components and software.

Datacenter providers rely on Broadcom’s custom-chip design and networking semiconductors to build their AI systems. The company also sells components for cars, smartphones, and internet access gear. Its push into software, meanwhile, includes products for mainframe computers, cybersecurity, and data center optimization.

Over the long term, the AVGOs CEO believes that the AI chip market will move to custom, in-house designs. That would mean shifting away from Nvidia components — a change that could benefit Broadcom since it helps customers produce their chips.

Apple is a top customer as well: Broadcom provides key components for the iPhone.

Chip stocks were hovering at an all-time high just a few weeks ago.

The scandal that spurred a selloff in chips was the accounting issues at SuperMicro.

The initial event opened up a can of worms and signaled to traders to take profits while conditions were still favorable.

Now chip stocks are telling traders that they cannot keep up with the high expectations and investors will need to taper back the whole idea that AI is about to overtake the world.

Even if AVGOs AI business is doing exceptionally well, they have a legacy business that is bringing up the rear and could be a drag on the overall business for years to come.

AVGO is still a stalwart in the chip business with interests in the right verticals and I do believe it is still a long-term buy especially considering they still haven’t successfully integrated VMware.

 

 

This is the first blip in quite a while for the chip sector.

It has almost been perfect in the latest leg up in the tech market carried by heavy hitter Nvidia (NVDA).

I don’t think this will have a significant knock-on effect on the prospects of NVDA.

NVDA is an animal of its own and I do believe we will see great earnings and positive forward guidance that could mean the next gasp up in tech stocks. 

Today represents the first black eye for the AI generative movement when short seller Hindenburg research accused Super Micro Computer (SMCI) of “account manipulation.”

There was a three-month investigation and many former insiders were contacted.

Hindenburg research has a pretty good track record calling out tech frauds.

Most of their calls focus on public stocks helmed by predominately Chinese nationals.

SMCI stock crashed 25% on the day, and it is an ominous setup going into Nvidia earnings later today.

Hindenburg said it reviewed various instances that suggested there were ongoing bookkeeping issues within the $35 billion tech firm even after the SEC charged it with "widespread accounting violations" in 2020.

Workers within the company said they faced pressure to meet high sales quotas, even after the company was charged by regulators.

The high quotas incentivized some workers to ship defective products.

Some of Super Micro's partners appeared to do little business outside their relationship with Super Micro. Ablecom, one such partner, exported 99.8% of its product in the US to Super Micro, while Compuware, another partner, exported 99.7% of its product to Super Micro.

Hindenburg also said Super Micro also ramped up exports to Russia after Moscow invaded Ukraine, which violated US sanctions.

Hindenburg highlighted quality concerns among Super Micro's customers, some of whom have turned to alternative suppliers. Tesla and CoreWeave, two of Super Micro's major customers, have inked high-profile deals with Dell over the past year because they found SMCIs products inferior.

The tsunami of bad news for SMCI means it is time to avoid the stock.

The company faces a torrent of accounting, governance, and compliance issues and offers an inferior product and service now being eroded away by more impactful competition.

The accusations are quite structural and investors won’t be able to just turn a blind eye to all of this.

SMCI delayed reporting their earnings at the last second which tells an investor audience that much of the accusation has some truth to it.

There is a lot to solve internally and I don’t think investors should swoop in and buy the dip just yet.

If there is a bounce, it most likely will be a dead cat bounce.

Although not an existential problem, this short seller report will set back SMCI 5 years and that is a long time in the world of tech.

Readers should avoid this chip stock and head to higher ground.

There is a possibility that this is just the tip of the iceberg and the core could find out to be a lot more rotten than first thought.

Readers will be better off sticking with the likes of Nvidia, Broadcom, AMD, and Micron.