VIDEO: Why We Might Adjust the Portfolio After Broadcom Selloff

In today’s Portfolio video, Chris Versace discusses a potential adjustment we are contemplating to the Portfolio’s chip holdings.

As he explains, against the backdrop of AI and data center chip demand being far stronger than supply, and Broadcom (AVGO) shares selling off hard on Friday, we are considering making some room for the shares by adjusting the Portfolio’s overall chip exposure.

As Chris points out, the Portfolio is contemplating this move with a potential decision to come over the weekend. Our goal in discussing this with you on Friday is to avoid blindsiding members should a decision to go forward with this move be made.

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Transcript

CHRIS VERSACE: Hey, everyone. Chris Versace here, Friday, December 12. And we are seeing, my friends, a bit of a weak ending to the trading week. There's some concern, or renewed concern or continued concern, about AI that's weighing on the chip sector. We know, of course, that constitutes quite a bit of the S&P 500 and NASDAQ 100.

Remember, it kicked off earlier with earnings from Oracle. And now we've got some reports out there that are saying some of those data centers that Oracle was targeting in that big backlog, targeting for 2027, are slipping to 2028. This is just another issue that's weighing on this part of the economy, even though what we see from adoption rates, usage rates continue to grow. I'll talk more about that in a second.

What's the issue with the pushout in Oracle's datacenters? Well, a combination of labor and materials being, as they're saying, "short," meaning not enough. Now, let's read between the lines a little bit.

We know that chip demand, AI and data center especially, has been strong. And we've had a lot of commentary about how demand is outpacing supply. We've heard that from NVIDIA. But it also, when we think about the comments from Marvell about their multi-year order and backlog levels being very robust, CEO Matt Murphy coming out, being very, very confident and comfortable with the forecast that he has laid out-- again, the multiyear forecast that we talked about. That's another positive data point.

And then last night from Broadcom, the company sees accelerating demand for AI chips and infrastructure building software. They have 73 billion in AI-related backlog. That's expected to be delivered over the next 18 months. We can also layer in the comments that we've heard from Dell and the strong ramp in their AI servers. That'll be shipping in significant volumes in the current quarter, and in 2026.

So let's just, again, put some more pieces together. As I mentioned, we continue to see rising AI adoption and usage in the enterprise. We talked about that report earlier this week from OpenAI, admitting that it's a little one-sided. But when we look around at the deals that Anthropic is making, and other progress on AI in the enterprise, really leaning into the variety of signals that we've shared with you-- and we'll have some fresh ones tomorrow, as well-- we see that continuing to climb.

There's also the potential for consumer use of AI to grow considerably. On the one hand, we do have the AI enabled Siri being brought to market next year by Apple, likely some competing efforts, as well. But let's remember, too, the announcement that was made yesterday between Disney and OpenAI about the licensing of Disney characters in OpenAI's short-form AI-generated video product known as Sora. Here, too, we're going to see some competing efforts.

And in an alert to you yesterday, we really took the time to understand what this implication is as we move from text-related queries to video creation using AI, and the multiplier effect that it's going to have on data being consumed, passed across the network, it is going to be simply explosive. And we've seen things like this before-- first with internet traffic, with giving way to streaming audio and video, and the pressure that put on existing networks. And I think we're going to see it again. And again, we walked through all of this in a note with you yesterday. So if you missed that alert, I would strongly suggest that you go back and take a look at it.

Now, why are we talking about all this? Well, because as we think about that robust demand for chips, and we think about the positioning that we have in the portfolio-- we have NVIDIA, we have Marvell, we have Qualcomm-- we are seeing what's unfolding in the shares of Broadcom in this 10%, 11% pullback, despite those robust backlog numbers.

Now, as we think about our existing position with NVIDIA, clearly extremely strong in AI and data center, arguably by many, the chip of choice. Marvell, we have data center, interconnect, networking, infrastructure, as well as some custom AI silicon. Qualcomm gives us the exposure to smartphone, PC, especially AI PCs, IoT, automotive, and there is some potential data center/AI opportunity there.

Now, those three positions account for around 11% of the portfolio's assets. But as I mentioned, Broadcom, those shares are falling hard, and the company has that wonderful backlog. And if we were to add some Broadcom shares to the portfolio, it would not only shore up the portfolio's position in the custom AI silicon market, but it would strengthen its position in digital infrastructure-- both on the chip side and the software side. It would also bring some greater exposure to cybersecurity and infrastructure software.

So we are bringing this message to you today because I want to share with you that we are contemplating making some adjustments to our existing chip holdings. Does that mean we're going to get rid of anything? No. It means that we might make a little room to make it possible to add some Broadcom shares to the portfolio, without dramatically increasing the portfolio's overall chip exposure.

Think of it this way. That 11% or so that I mentioned that's currently spread across three chip holdings, it could potentially move to 4% and 11%, could move up slightly. What would this do? It would give us a much broader based exposure in the chip sector. It would shore up our position in a couple of different areas.

As we share this with you, please remember that we want to continually evaluate positions in the portfolio. And as we've talked about with you, we really want to favor those with superior EPS growth. So when we think about Broadcom, expected EPS growth over the coming quarters, multiples higher compared to the S&P 500, we also have that with Marvell, and of course, NVIDIA. Broadcom also has a dividend, so arguably it could help improve our dividend exposure marginally.

Now, if you're saying to yourself, he's telling us this seems to be a bit out of ordinary for the portfolio. My response to you is the following. There are times when we get an opportunity to not just improve our positioning, but it's an opportunity to pick up shares that are falling hard, that arguably are overdone.

Now, is this a foregone conclusion that we are going to do this? No, it's not. Over the weekend, we will be making some decisions about this potential move. And I will share that if we see Broadcom shares hold the 50-day moving average at 362, the odds of us making this move as we start next week are that much higher.

Now, why are we telling you this today? For the simple reason that, because it's a little bit out of the ordinary and arguably will require some movement across a few positions, we didn't want to blindside you. Especially because just yesterday we talked about some moves that we were thinking about when it comes to Welltower shares, given the recent pullback.

So my message to you this. We are contemplating such a movement, and depending on what we decide over the weekend, we could very well hit the ground running early next week. That means it would be a busier week for the portfolio, ahead of what is already shaping up to be an extremely busy set of days next week, given the volume of economic data that is coming at us.

Remember, it is the same economic data that is going to reshape not only GDP expectations, but it's going to update us on the health of the jobs market and what's going on in inflation. And that, my friend, that cumulative picture, could reshape expectations for what the Fed could do in 2026. Earlier this week, the Fed updated its set of economic projections with just one rate cut targeted in 2026. But remember, as Powell himself said, next week we're going to get all this data, and that could reframe those expectations.

So we're going to have a busy week next week. We're going to hit the ground running. Again, another reason why we wanted to share this line of thinking with you today, should we opt to initiate that move rejiggering the portfolios chip exposure come Monday. I will share with you that the goal here is to improve our position, improve our exposure, and we'll see what happens.

So stay tuned. We could very well have a lot of big things to talk with you come Monday. My friends, have a wonderful weekend.

And remember, later today we will have the weekly roundup coming out. It's going to spell out in much greater detail all the things that we'll be looking at when we start next week. Have a great weekend.