Broadcom Discount Entices But Watch For Stormy Clouds Ahead - Broadcom (NASDAQ:AVGO)

China's DeepSeek headwind continues to impact the broader technology sector, particularly enterprises related to artificial intelligence, such as Broadcom Inc AVGO.

Rivaling the capabilities of American counterparts at a fraction of the cost, the latest machine intelligence model potentially signals increased competition in AI hardware and chip designs. Should Chinese companies establish a foothold in this area, Broadcom's stock is vulnerable.

The existential threat cannot be emphasized enough. Much of the reason why Broadcom has been such a dominant performer over recent years ties directly to its financial strengths. For one thing, the tech giant consistently beats ever-rising per-share earnings targets. Second, its revenue tallies — while not always beating estimates — remain impressive. However, DeepSeek could potentially undo all this hard work, thus underscoring anxieties.

It really comes down to the print. On Monday, Broadcom and the group of tech stocks known as The Magnificent Seven saw nearly $900 billion in market value erased within the first half-hour of trading. If Chinese AI competitors continue to muscle their way into the market, U.S. firms may lose their dominance and subsequently, their pricing power. Notably, Broadcom’s stock is up only modestly on Tuesday afternoon.

To be sure, not all analysts see doom and gloom ahead. For example, JPMorgan's Harlan Sur refuses to hit the panic button. Instead, the market expert points to history, where efficiency improvements in computing have driven more demand, not less.

Historical trends also bode well for Broadcom — but there is a possible twist to consider.

Pricing Behaviors Favor Broadcom

Over the past five years, Broadcom — even accounting for Monday's collapse — is still up almost 600%. It's a remarkable performance, affirming the security's upward bias.

Specifically, on a week-to-week basis, a position entered at the beginning of the period has a nearly 58% chance of being profitable by the end of it. This dynamic extends to at least a four-week basis, where the odds of success rise to just over 67%. In other words, from a stochastic perspective — that is, devoid of any other context beyond the temporal — traders have a greater chance of being profitable than not.

What's more, from a dynamic perspective — specifically accounting for DeepSeek's extreme-fear event — the circumstances for the stock become even more auspicious. Currently, the company is on pace to lose around 17% of value for the week. In the past five years, there have only been three instances when Broadcom lost double-digit percentage points, as follows:

During the business week beginning April 15, 2024, it lost 12.06%.
For the business week beginning Sep. 2, the stock dropped 14.58%.
Finally, in the five days starting from Nov. 11, the equity slipped 10.12%.

By the end of the fourth subsequent week following each of these extreme-fear events, Broadcom was in the black and significantly so. The median return following such events stands at a ridiculous 28.94%.

So, what's the risk in buying the Broadcom discount? In the technical charts, Broadcom appears to be in the middle of forming a pattern somewhat reminiscent of a head and shoulders.

It's not a standard bearish formation, to be completely upfront. However, with Nvidia Corp. NVDA also printing a similar-looking pattern, it's a risk factor to be cognizant of.

Tempting Trades Available for Aggressive Speculators

Undoubtedly, bidding up securities that have suffered double-digit losses is always a risky affair. Further, the looming dark clouds of a potential head-and-shoulders pattern means that at the very least, traders must be vigilant. Nevertheless, for aggressive speculators, opportunities abound in Broadcom.

First up, Broadcom historically tends to see a significant move higher in the first week following an extreme-fear event. Admittedly, it's tricky to model the impact of DeepSeek because it happened on a Monday as opposed to an entire week. Typically, the median return for a first-week extreme-fear response stands at 16.99%. Cutting this projected return by half and applying it to an estimated per-share price of $204 yields an end-of-Friday target of $221.

The most battle-hardened speculators may consider the 210/220 bull call spread for the options chain expiring Jan. 31. For traders to collect the maximum payout (which stands at over 415% at time of writing), Broadcom must reach or exceed the short strike price of $220.

Next, Broadcom stock tends to see a significant upside in the fourth week following an extreme fear event. Based on historical data, it's possible that Broadcom could rise by nearly 29% by the close of Feb. 21. By cutting this target by half and applying it to the estimated $204 per-share price, a forecast of $233.58 materializes.

Adventurous traders may consider the 220/230 bull call spread for the options chain expiring Feb. 21.Broadcom stock must at least hit the $230 short strike price to collect the full payout, which currently clocks in at nearly 363%.

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