UBS Suggests Broadcom Stock (AVGO) Selloff Overdone As Price Target Raised

Broadcom Inc. (NASDAQ: AVGO) had a huge pullback in its stock price to close last week, down 11.43% following the release of  earnings, triggering debate about the market's reaction to the company's AI-driven growth strategy and potential margin compression. The key question revolves around whether the selloff was an overreaction, given Broadcom's significant advancements in the artificial intelligence sector, and a callout this morning from UBS.

This reaction stemmed from concerns surrounding the company's projections of increased AI revenue coupled with warnings of potential margin compression due to the substantial investments required in the AI sector. CEO Hock Tan revealed a robust $73 billion backlog of AI product orders slated for delivery over the next 18 months. This news initially failed to reassure some markets, which focused on the potential impact on profitability.

However, several analysts have since weighed in, suggesting that the market's initial response was disproportionate. UBS analyst Timothy Arcuri raised the firm's price target on Broadcom to $475 from $472 this morning, reiterating a “Buy” rating on the shares.

Arcuri pointed out that the sharp pullback highlighted a consensus-long position in the stock, implying that the market reaction was an overcorrection. The analyst's commentary emphasized that Broadcom's AI semiconductor revenue supports higher expectations for fiscal year 2026, leading to upward estimate revisions.

Other analysts echoed this sentiment, adjusting their price targets upward despite the initial market jitters. Susquehanna increased its price target to $450 from $400, maintaining a “Positive” rating. Bank of America Securities raised its target to $460 from $400, reaffirming a “Buy” rating, while Morgan Stanley increased its target to $443 from $409, sustaining an “Overweight” rating. These adjustments signal a continued confidence in Broadcom's long-term prospects, particularly within the burgeoning AI landscape.

Beyond Broadcom, the broader tech sector experienced a selloff, with the S&P 500 and Nasdaq both declining as investors grew wary of an AI-fueled bubble. Despite these short-term pressures, the underlying sentiment towards AI remains largely optimistic, with many investors viewing recent volatility as temporary dips rather than signs of a larger downturn.

The discrepancy between strong AI revenue projections and concerns over margin compression highlights a interesting dynamic. While increased AI revenue is undoubtedly a positive indicator, the associated costs and investments can impact short-term profitability. The market's initial reaction reflected these concerns, but subsequent analyst adjustments and continued optimism surrounding AI suggest that the selloff may have been an overreaction. 

The stock is trading mildly higher in the pre-market, up 0.2% at $360.66 leading into the open.