A leading semiconductor and infrastructure software company, Broadcom (NASDAQ:AVGO) has represented a cornerstone in the development and proliferation of artificial intelligence. Thanks to its dominance in AI-centric chips along with networking and software solutions, the tech juggernaut saw its equity valuation skyrocket. Still, AVGO stock faces some near-term questions.
Earlier this week, China’s AI model called DeepSeek roiled the equities space. It wasn’t just about the competition. Rather, DeepSeek offers a viable AI alternative at a fraction of the cost. Such a massive shot across the bow threatens American hegemony in the machine intelligence ecosystem. By logical deduction, the enormous pricing power that entities like Broadcom freely leverage may come under direct fire.
To be sure, not every analyst views DeepSeek as an existential threat to AVGO stock. And in some cases, the innovation undergirding the Chinese AI model could be bullish for certain tech enterprises. However, the issue with Broadcom is that the business has richly benefited from a dominant market position.
Prior to the disruption, analysts didn’t blink an eye regarding 19% projected annual revenue expansions. Now, such forecasts can’t be taken for granted. As a result, other elements — such as estimates calling for per-share earnings to rise over 30% this year — have now attracted skepticism.
It’s not that AVGO stock has suddenly become a fundamentally poor investment. Rather, investors are simply questioning the prudence of paying a premium of almost 161X last year’s earnings.
Although most investors gravitate toward the buy-low, sell-high mentality, actually practicing the philosophy can be exceptionally difficult, even for an established enterprise like Broadcom. After all, a few bad sessions can easily erase months, sometimes years, of equity buildup.
That said, AVGO stock enjoys the advantage of an upward bias. Using data from the past five years, there’s a 57.95% chance that a position entered at the beginning of a week will be positive by the end of it. Extend this period to a four-week basis and the odds improve to 66.67%. Generally speaking, the passage of time leads to greater confidence in the security’s upward prospects.
Put another way, when viewing AVGO stock stochastically — that is, applying no other context aside from the temporal — bullish investors natively enjoy a critical advantage. When viewed dynamically, the odds don’t change. In fact, evidence suggests that they improve.
Take for example the current framework, with AVGO stock on pace to lose around 15% to 16% this week. In the past five years, AVGO has only lost 10% or more in a one-week period three times. In each case, by the fourth subsequent week, Broadcom stock stood in positive territory with a median return of 28.94%.
So, bullish investors have reason to be confident over the next few weeks. Nevertheless, that AVGO stock apparently hit its peak this month may be problematic because the price action from early 2024 to now somewhat resembles a large-scale head-and-shoulders formation.
Stated differently, you can (probably) have your fun with AVGO stock — but you must be nimble.
Putting it all together, there are two narratives at play. First, AVGO stock could offer a near-term upside opportunity. Second, over the intermediate to long term, Broadcom risks struggling due to the implications of the possible head-and-shoulders pattern.
Again, being nimble is key. If that’s you, you may consider the 220/230 bull call spread for the options chain expiring Feb. 21. At time of writing, the net debit required to enter the trade is $254, with a maximum payout potential of $746.
To be sure, the high payout reflects just how risky the 220/230 spread is. However, statistical trends point to the very real possibility that AVGO stock could reach $267.37 by Feb. 21. Therefore, a $230 price target is relatively rational.