Broadcom (AVGO) reports earnings after the close, and investors want to know if its AI growth story still has room to run. Wall Street expects revenue to jump 83% to more than $29 billion. Adjusted earnings are projected to rise 90% to $3.22 a share. The biggest question is whether Broadcom (AVGO) will raise its revenue outlook for 2027 after holding that forecast steady last quarter. Investors also want reassurance about how long AI chip demand will last and about the company's relationship with its top customer, Google (GOOGL). The stock is down roughly 30% from its June record high, and its premium valuation leaves little room for disappointment.
The three AI chip players
There are three big names in AI chips: Nvidia (NVDA), AMD (AMD), and Broadcom (AVGO). They are similar and different at once. Nvidia (NVDA) is big in GPUs, is moving into CPUs, and buys equity stakes in its customers. AMD (AMD) is big in CPUs, is starting to compete on GPUs, and pays its customers with its own equity. Broadcom (AVGO) is different because it makes custom chips, and it carries a VMware problem.
Broadcom (AVGO) makes application specific integrated circuits (ASICs), which are specialized chips for buyers who want to move away and diversify from GPUs and some CPUs. That makes Broadcom (AVGO) both a direct competitor and a partner of Nvidia (NVDA).
The VMware risk
The VMware problem may be the reason the stock is lagging. Broadcom (AVGO) guarantees the lease payments of its clients and helps them buy its products. Reports say much of the trouble is VMware: it has security flaws, and those flaws could hurt the 79% operating margins the company boasts. Going into earnings, the main risk for Broadcom (AVGO) looks like VMware.
There was also news that Google (GOOGL) might be moving away from Broadcom (AVGO), possibly toward Marvell (MRVL), which could hurt some of its growth. Even so, the chip side of the business is expected to grow over 140%, up to nearly $20 billion.
A low bar into the print
The stock saw a 25% pullback from its all-time highs right before last quarter's earnings. It is now acting the way Nvidia (NVDA) did after its last couple of earnings reports. Nvidia (NVDA) put up spectacular growth numbers but did not get rewarded for a few quarters in a row. Broadcom's (AVGO) numbers are strong too: about 84% revenue growth and roughly 90% EPS growth. Because of the recent price action over the past couple of weeks, the bar going into this report is actually low. Spectacular numbers do not guarantee the stock goes up.
Bullish trade: a call calendar
The option market prices a one-day move of about $24. The expected move through September 4th is about $29. September 4th options are trading around 130 implied volatility, while September 11th options are trading around 70 implied volatility, almost double.
The bullish setup uses the 395 strike. Buy the September 11th weekly 395 call (expires in 9 days) and sell the September 4th weekly 395 call (expires in 2 days). This is a call calendar. It costs about a $1.60 debit, so the risk is $160 on an almost $400 stock. The trade uses the gap between the high near-term September 4th implied volatility and the lower September 11th implied volatility to lower the entry price.
Maximum profit sits at or near 395. There is a profitable range of about $15 to $20 on either side of 395. The idea is that after earnings the stock rallies toward 395, which expands the price of the calendar. What you do not want: the stock sitting flat or going lower, or the stock climbing above $420 to $425, where profitability falls off. There is assignment risk on the short option over the next couple of days. If you were bearish instead, you could run the same idea with a 20 to $25 out of the money downside put calendar.
Neutral to bearish trade: a short call vertical
The second setup is neutral to bearish and goes out to the September 11th weekly for extra time. Sell the 390 strike call, which is $20 out of the money to the upside, and buy the 400 call against it. This is a short $10 wide call vertical that collects about a $2.50 credit. You can make $250 with $750 in risk. The break even is 392.50 to the upside.
A possible resistance level is the 50-day simple moving average, just below 385, since the stock has broken through it. Going out an extra week gives room in case the stock rallies against the position. Nvidia (NVDA) showed this pattern: it rallied sharply after earnings, then came all the way back down a few sessions later.
Why go out the extra week? You collect more premium. If you are right directionally with a short call vertical, whether the stock stays flat, rises a little, or falls, the larger credit means more profit. You may not get it as fast, but you get more. If the premium in the near strikes is too small, moving to the next expiration collects more.
There is about a 70% probability the 390 strike finishes out of the money, which is what you want. The plan is for the stock to stay below 390 so you keep the collected credit or buy it back cheaper. If it stays below 390, implied volatility comes in, which also helps. You can close ahead of expiration if you get the move you want. The trade is profitable if the stock goes down, stays where it is, or goes higher but stays below the 392.50 break even.
