In some cases, the stakes are so high and the difficulty level so high that it can be too difficult to play. In that case, no amount of formal research will be able to understand the impact on the stock price. But you have inherited problems and you need to deal with them. Otherwise, you can’t judge them at sea too. There are not one, but two, maybe three situations that concern me, especially since the price-to-earnings ratio is so high. What are the two stocks in question? Broadcom and Costco. Broadcom, the backbone of many hyperscalers, is trying to eclipse fellow club name Nvidia, a major AI chipmaker whose high-speed processors are at the heart of many artificial intelligence data centers. First, let’s take a look at Broadcom. When it comes to the custom AI chip business, Broadcom’s customer list includes Alphabet’s Google, Meta Platforms, TikTok’s parent company ByteDance, and OpenAI. Additionally, AI startup Anthropic was also recently revealed as a $10 billion customer. Meanwhile, Broadcom is rumored to be in talks with Microsoft about moving its business away from Marvell Technology, the director’s competitor in the custom chip design space. There were also concerns that Marvel would lose some business from Amazon. Importantly, Marvel CEO Matt Murphy, who I trust implicitly, appeared on Mad Money and said they weren’t losing business. I believe in him. At the same time, Bloomberg News on Friday reported that Oracle has postponed the opening date of some data centers it is building for OpenAI, the giant startup run by Sam Altman. OpenAI has committed to spending $300 billion over five years on Oracle’s computing power. This number is considered robust because it falls within Oracle’s RPO, or remaining performance obligation. This represents more than half of Oracle’s $523 billion RPO. Despite OpenAI being at the center of the discussion, anything that indicates that OpenAI is not profitable could have a huge negative impact not only on OpenAI, but on this entire ecosystem. According to Bloomberg, the pushout period is from 2027 to 2028, citing labor and material shortages as the reason. Importantly, Oracle said in a statement that “there are no site delays and all milestones are on track to meet our contractual commitments.” Oracle is Larry Ellison’s company, and Ellison has not made any false claims, so it can be trusted. But can Sam Altman be trusted? We don’t know enough about him and his company is private. The Bloomberg article may be wrong. But maybe not. Despite Oracle’s written response, many people took this story as gospel. But it’s also possible that everyone is right. Coreweave’s quarterly report shows that building these sites can be problematic. These are extremely complex and companies are all competing for the same components. Oracle has established itself as an expert in building them. But what if Oracle is having trouble building data center sites for OpenAI, causing a pushout? What will happen to the pace of chip orders from Nvidia, which is almost always included in every data center? These are fundamental questions that must be answered. We thought the broader AI build picture would get some clarity when Broadcom reported its quarterly results Thursday night. But that answer was obscured by issues raised by CFO Kristen Spears on Broadcom’s conference call. At the beginning of the conference call, Broadcom said it has an AI order backlog of about $73 billion, including orders for AI server systems that include custom chips and other components. The numbers excited Wall Street, and the stock initially rose about $15 per share in after-hours. But in a subsequent call, Spears said the AI systems business is less profitable than other chip-only orders because of low margins and pass-through costs. When Mr. Spears made that disclosure, Broadcom stock took a frightening pirouette, dropping to about $380, losing a frightening $35 from overheated after-hours levels. That would be a nightmare, and the stock fell further during regular trading on Friday, ending the day at $359.93. Part of this further decline is due to the first issue I mentioned: potential delays related to Oracle’s OpenAI efforts. The rest was a pass-through issue. AVGO YTD Mountain Broadcom’s year-to-date stock performance. Now, let’s go back to the first problem. I don’t like being on the battlefield because the possible outcomes are too uncertain. These issues created their own battlegrounds. OpenAI is private, so you can’t really solve it. Hearing about potential delays related to OpenAI, I can’t help but wonder if OpenAI has the funds to meet all its obligations over the next few years, even if other reasons are cited in the article. How do we know if Broadcom’s business isn’t as strong as we think? We know that OpenAI has access to $40 billion in capital, or at least says it has that access. We do know that the company has raised $1 billion in equity from Disney. It was all so strange. Why didn’t OpenAI have to pay Disney and vice versa? Was it really to block Google while still making sure OpenAI got the characters for its AI video generation tool Sora? Still, this deal was vague and felt very similar to the kinds of crazy deals I heard back in 2000, deals that everyone told me was smart and I thought were ridiculous. All of this is very theoretical. I don’t like being theoretical. Who would want to get caught up in this web of intrigue? Not me. No one else. Therefore, Broadcom’s stock price plummeted. This business-to-business deal allows us to spin around and think that OpenAI is worth more than we thought. Enterprise business is more valuable than B2C transactions, which is OpenAI’s current focus model. This is similar to the aforementioned Anthropic, whose large investors include Amazon, Microsoft, and Google. Antropic is loved on the streets. OpenAI isn’t as trusted because of the company’s insanity, including CFO Sarah Friar’s bizarre comments that the government could “backstop” the company at any time. It was later denied by Friar, but this is some sort of magical, sudden comment. Again, everything is too difficult. This means Broadcom stock is worth less than we thought, at least on this issue. Once again we have to play the game “Who do we trust?” I trust Hock Tan, the long-time CEO of Broadcom. In other words, you shouldn’t run away from stocks. Others clearly don’t have as much faith, otherwise the stock wouldn’t have fallen as horribly as $46 (11.4%) on Friday. This is not the first time Mr Hock has been questioned by the market. This isn’t the first time the market has gotten it wrong. I’m with Hook. Of course, we’re all for Broadcom, which is still up 55% year-to-date despite Friday’s pullback. However, the price-to-earnings ratio is quite high at nearly 42 times before earnings, so there isn’t much margin for error. That’s exactly the case with high multiple stocks. I mean, it’s difficult, but we don’t like tense places, battlefields. We believe that Mr. Hock is right. Just like a few years ago when the stock price fell after another quarter and it turned out to be an unfounded fear with a lot of insider buying. Is there a possibility that something like that could happen again? I think so. I don’t know yet. In summary, Broadcom is fine in my judgment, but its position is much harder to defend at this point. Protect it by owning it instead of buying more. Now, let me introduce you to Costco. The first and most obvious issue is P/E. And yes, it almost always comes back to P/E. Next year’s P/E ratio is 43 times, which is higher than the S&P 500, which trades at a forward P/E ratio of about 22 times. Historically, however, Costco’s valuation far exceeds the market, which is not unusual. In fact, at this time a year ago, Costco’s P/E ratio was above 50, while the S&P 500 index was still around 22, according to FactSet data. As long as the stock price isn’t near its lows, it wouldn’t be a problem for Costco’s price multiple to fall. What we’re seeing now is that there’s a fear that stock prices will fall because investors aren’t willing to pay as much for future profits. This is how you can achieve multiple compressions. Indeed, Costco had a predictably strong quarter. But it wasn’t better than the estimate. To maintain a high multiple, returns must be better than expected. As far as I remember, Walmart’s multiple is 40x, witness Costco. That speaks for itself. why is that? There are several reasons. First, customers aren’t renewing their memberships like they used to. We’ve seen this effect for several quarters, which is very unusual. The company has an excuse. Most of them are young people who obtain memberships online rather than signing up at a warehouse. But I don’t care about such excuses. That’s a red flag. Additionally, this quarter had a “lumpy feel” to it that I didn’t really like, but I think it got better as the quarter went on. Third, Costco’s Chief Financial Officer Gary Millerchip, a newcomer hired from Kroger to replace Richard Galanti, the company’s irreplaceable longtime financial officer, once again used the word “selective” to describe consumers. I think “selective” is a slang term for “too expensive.” I don’t associate that word with Costco. Not optimal. COST WMT YTD Mountain Costco’s year-to-date stock performance compared to Walmart. So what should I do? As I mentioned in my morning meeting last week, I’m very concerned about this and how analysts seem to be more focused on Costco’s technology efforts. However, two analysts on the call asked about renewal rates, and their responses were that online member renewal rates should be a little better than they were before, thanks to some targeted efforts. It wasn’t reassuring. Unlike Broadcom, this company won’t support a high multiple unless comparable sales are significantly lower than expected. This bothers me. I became obsessed with it. Is Walmart catching up? Will Walmart pass it? Is Wal-Mart better than Costco? My mom told me that comparisons are disgusting. But it’s really worrying. When it reported its quarter, I thought Costco was going to go up. Because there was additional talk of going online and ramping up advertising strategies like Walmart. However, they are far behind, which is still a concern. I play open handed. I weigh all of this against its long history of being special. I don’t think it helps that Costco is fighting with the government over tariffs and, before that, diversity initiatives. Whether you like Costco or agree with it, you have to accept that some people may be turned off by this stance. As a shareholder, I’m not happy about this because I’m trying to figure out the real reason for low renewal rates, especially among young people. Why worry as much as I do? Because of Target, that’s why. Many stuck with Target long after they had problems there. It’s a retail business. Retail is one of the most difficult businesses. You can slide. It may fall. So don’t be surprised if we act on this position. I definitely don’t want to sell this stock. The company is great. I still get excited about going to the store. But I can’t afford Target. You can’t do that. That being said, you should expect some action. There’s no way I can’t sleep over this. So I sigh. That’s not what we want. But it almost has to happen. (Jim Cramer’s charitable trusts are Long COST, AVGO, NVDA, AMZN, MSFT, META. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
