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If there ever were to be a fourth "Hangover" film — spoiler alert: there won't be — it may be centered on the current artificial intelligence ecosystem. With multiple experts sounding the alarm about a potential correction (or even an outright crash), entities like semiconductor and software giant Broadcom Inc (NASDAQ:AVGO) face a massive question mark.
Much of the anxiety has to do with the sheer performance of AVGO stock. Since the start of the year, the security gained about 48%. In the trailing 52 weeks, it has more than doubled in value. In tech terms, these stats aren't exactly mind-blowing. However, Broadcom now commands a market capitalization of approximately $1.62 trillion. That's about the size of Spain's GDP, which ranks 15th in the world.
Naturally, no one wants to be left holding the bag on an enterprise with such a rich nominal premium. Combined with fears of an AI bubble, many investors are concerned about a steep correction occurring.
Still, it might be helpful to consider the broader context. Generally, crashes occur when people least expect them to and when they're forced out of their bullish positions. These two concepts usually go hand-in-hand, as people who don't expect a crash are rarely hedged for that outcome. Thus, when the red ink flashes, a panic ensues. It also "helps" when unemployment is sky-high and credit markets are tight, leaving little financial flexibility.
Right now, circumstances are bad but manageable. Further, the Federal Reserve is accommodative with its lowering of interest rates, making the catalyst of a crash less intense.
Perhaps the biggest factor benefiting a name like AVGO stock is that there's no indication that AI demand itself is weak; rather, quite the opposite. Moving forward, the concern may be centered on execution rather than the low-hanging fruit of mere participation.
While the contextual narrative of the AI ecosystem — that the most stable, well-executed enterprises may win out in the next phase of the machine intelligence business cycle — may be conducive for AVGO stock, it doesn't really help pinpoint a specific trading idea.
After all, the fundamental analysis that Wall Street analysts use is an unscientific, unfalsifiable mechanism that, when stripped of all the corporate accounting lexicon, really just amounts to trust-me-bro logic. While this might sound pugnacious, you must ask yourself: if intrinsic value is a universal truth claim, why is there a 114% spread between the high and low analyst targets?
Besides, what on earth are we supposed to do with such a vast spread? I propose using data science to estimate the tendencies of how securities drift under different pressure points.
Using a Kolmogorov-Markov framework layered with kernel density estimations (KM-KDE), price behavior can be treated as a discretized, probabilistic space with real outcomes and distributions. Essentially, we can treat AVGO's price action not as a singular journey across time but as multiple trials over given intervals. We can then observe how these trials diverge when a specific signal or stimulus is applied to AVGO.
Using the KM-KDE approach mentioned above, the forward 10-week median returns of AVGO stock can be arranged as a distributional curve, with outcomes ranging between $327 and $382 (assuming an anchor price of $341). Further, price clustering would likely be predominant around $361.
The above assessment aggregates all sequences going back to January 2019. However, we're not interested in the baseline state that encompasses the entire dataset but rather the specific signal at hand. Right now, AVGO stock is structured in a distributive 4-6-D formation; that is, in the past 10 weeks, AVGO printed four up weeks and six down weeks, with an overall downward slope.
Under this condition, the forward 10-week returns would likely expand to a range encompassing $322 to $403, with primary price clustering predominant at $353 and secondary clustering likely to occur at $376.
Subsequently, while risk slightly increases, the potential reward rises at a much greater magnitude. As such, the bullish trade is quite tempting, especially with the favorable data.
While there's bound to be substantial debate about which options trade to select when talking about Broadcom, the idea that really stands out to me is the 350/360 bull call spread expiring Jan. 16, 2026. This trade requires two simultaneous transactions: buy the $350 call and sell the $360 call, for a net debit of $435, which is also the maximum loss possible.
Should AVGO stock rise through the second-leg strike ($36) at expiration, the maximum profit clocks in at $565, a payout of nearly 130%. Further, breakeven lands at $354.35.
Two factors make this trade very attractive. First, the $360 strike is between the two clustered zones of the 4-6-D distribution. Second, the strike is very close to the baseline cluster. Because of this dynamic, I would imagine that there's a relatively high probability that AVGO stock reaches this level by early next year.
Keep in mind that the exceedance ratio of AVGO stock relative to the starting point of each 10-week sequence typically runs above 60%. Therefore, unless something catastrophic happens, Broadcom may represent one of the more exciting ideas amid the current tech sector weakness.
The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.
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