On Wednesday night, something happened that does not seem very logical. Two of the hottest companies in the market reported earnings at exactly the same time: Broadcom and CrowdStrike.
Both beat Wall Street's expectations on revenue and earnings. Both raised their guidance. In other words, both told investors, "We're going to do even better than you expected."
And do you know what their stocks did?
They plunged.
Broadcom fell 14% and CrowdStrike dropped 10% in after-hours trading.
Yes. Fourteen and ten percent.
After beating expectations and raising guidance.
Let's start with Broadcom.
The company reported $22.2 billion in revenue for the second quarter, up 48% year over year. A new record.
Of that amount, $10.8 billion came from AI semiconductors, meaning chips used for artificial intelligence. That figure alone was up 143% compared to last year.
And it did not stop there.
For the next quarter, the company said it expects revenue of $29.4 billion, while Wall Street was expecting $28.53 billion.
Even more impressive, AI revenue is expected to climb to $16 billion.
Broadcom's custom AI chip customers now include Anthropic, Google, Meta, and OpenAI. In other words, virtually the entire AI ecosystem runs through Broadcom in one way or another.
The company also made another bold statement.
It believes AI chip revenue will exceed $100 billion by 2027.
Yes, you read that correctly.
"So why did the stock fall almost 13%?" you might ask.
Exactly.
We'll get to that in a moment.
Now let's look at CrowdStrike.
On the very same evening, the company reported earnings per share of $1.10 versus analyst expectations of $1.07.
Revenue came in at $1.39 billion compared to the $1.36 billion Wall Street had expected.
A beat on both fronts.
Its net new ARR, or annual recurring revenue added during the quarter, reached a record $256 million, up 32%.
Free cash flow also hit a record $468 million.
As if that were not enough, management raised full-year guidance to revenue of $5.91 billion to $5.96 billion and earnings per share of $4.88 to $4.96.
At the same time, the company announced a 4-for-1 stock split.
Beginning July 2, the stock will trade on a split-adjusted basis.
For anyone unfamiliar with stock splits, a 4-for-1 split means that if you owned one share, you now own four. The price per share is divided by four, leaving the total value of your investment unchanged.
"So why do companies do it?" you might ask.
Mostly for psychological reasons.
A lower share price appears more accessible to retail investors. If you want to call it that, it is largely a marketing move.
The fundamentals do not change.
The valuation does not change.
Only the numbers look more approachable.
In other words, CrowdStrike delivered everything an investor would want to hear in an earnings report:
Beat.
Raised guidance.
Announced a stock split.
Provided bullish commentary.
And the stock still fell 4%.
"So why did this happen to both stocks?"
To understand that, we need to look at two things.
First, CrowdStrike's stock had already gained roughly 60% in the month leading up to earnings.
Investors had effectively bought the earnings beat before it was announced.
When the report arrives and merely confirms what the market has already priced in, there is little room left for further upside.
In investing terminology, this is called being "priced for perfection."
The stock is valued as if everything will go perfectly.
If the results are merely excellent instead of perfect, the stock can still fall.
Second, analysts have one set of expectations, but large institutional investors often have another.
These unofficial expectations are known as the "whisper number."
And they are usually higher.
So when Broadcom projected $16 billion in AI revenue for the next quarter, Wall Street's consensus may have been around $16 billion.
But large institutional investors were likely expecting even more.
Perhaps $18 billion or $19 billion.
For them, the guidance was a disappointment.
And what does all of this tell me?
The AI trade has reached a point where "good" is no longer enough.
Results need to be spectacular.
And that is a warning sign.
I am not saying a crash is coming.
I am saying that when companies beat expectations and still get punished by the market, it suggests that investor expectations have reached extremely high levels.
