Broadcom & Costco Signal a Reckoning for High-Multiple Stocks

Broadcom and Costco's sharp declines signal a market reckoning for high-multiple stocks. Our analysis reveals the core risks and what investors should do now.

The Lede: A Market Wake-Up Call

Two of the market's most trusted titans, Broadcom (AVGO) and Costco (COST), saw their shares sharply punished last week, sending a tremor through portfolios heavily weighted in high-valuation growth stocks. This wasn't a random market fluctuation; it was a clear signal that in the current environment, even the slightest crack in a company's growth narrative can lead to a swift and brutal valuation reset. For investors, this dual takedown serves as a critical stress test for any stock trading at a significant premium to the market.

Key Data Points

Broadcom (AVGO) Valuation: Traded at nearly 42x forward earnings before its report.
Costco (COST) Valuation: Traded at 43x next year's earnings, almost double the market average.
S&P 500 Benchmark: The broader market trades at a more modest 22x forward earnings.
Broadcom's AI Backlog: Revealed a massive $73 billion in AI-related orders.
The Market's Verdict: Despite the backlog, AVGO shares plummeted 11.4% on Friday alone.

The Analysis: Deconstructing the Sell-Off

Broadcom: When AI Hype Meets Margin Reality

Broadcom's story is a case study in market narrative versus financial reality. The initial headline number—a $73 billion AI backlog—seemed to confirm its dominant position as a key supplier for giants like Google, Meta, and OpenAI. The market initially cheered. However, the optimism evaporated during the conference call when CFO Kristen Spears clarified that the AI systems business carries lower margins than chip-only sales due to pass-through costs. This seemingly small detail shattered the illusion of flawless profitability, causing an immediate reversal in the stock.

Compounding this internal issue was a report from Bloomberg suggesting a potential delay in Oracle's data center construction for OpenAI. While Oracle refuted the report, the incident highlighted a critical, often-overlooked risk: the AI buildout's heavy reliance on private, opaque entities like OpenAI. When investors cannot independently verify the financial health or project timelines of a key customer, uncertainty becomes a risk that demands a lower stock price. This created a perfect storm of doubt that even the trusted reputation of CEO Hock Tan couldn't immediately quell.

Costco: Cracks in the Fortress

Costco's challenges are more fundamental, striking at the core of its vaunted business model. For a stock trading at 43 times earnings, a merely "in-line" quarter is a disappointment. The market demands perfection, and Costco showed imperfections. Two key red flags emerged:

Slipping Membership Renewals: The company noted continued weakness in renewal rates, particularly from younger members who sign up online. While excuses were provided, a dip in this core metric is a direct threat to Costco's recurring revenue model and brand loyalty—its primary economic moat.
The "Choiceful" Consumer: New CFO Gary Millerchip's use of the word "choiceful" to describe consumer behavior was interpreted by the market as a euphemism. It suggests that even Costco's value proposition is being tested, and customers are becoming more selective—a word one does not want associated with a high-volume retailer.

With rival Walmart's valuation now approaching Costco's, the long-held belief in Costco's untouchable premium is being seriously questioned. Investors are no longer willing to pay for the story alone; they need to see flawless execution.

PRISM Insight: The High-Multiple Stress Test

Investment Strategy: The Peril of Multiple Compression

The swift declines in both Broadcom and Costco are a textbook example of multiple compression. When a company's stock price is fueled more by future expectations (a high P/E multiple) than by current earnings, any disruption to the growth story forces investors to re-evaluate how much they're willing to pay for those future earnings. The stock doesn't just fall; its fundamental valuation basis is repriced lower.

For investors, this is the primary risk of holding high-flyers. The same multiple expansion that created outsized returns on the way up accelerates losses on the way down. The lesson here is to scrutinize the justification for premium valuations. Is the growth story truly flawless? Are there any unquantifiable risks (like Broadcom's exposure to private AI firms) or subtle cracks in the business model (like Costco's renewal rates)? These events should prompt a portfolio-wide review to identify which holdings are most vulnerable to a similar repricing.

Industry Analysis: The Opaque AI Supply Chain

The Broadcom situation sheds light on a new, systemic risk within the AI sector. A significant portion of the infrastructure buildout is being driven by the capital expenditure of a few key players, some of whom, like OpenAI and Anthropic, are private. This creates an information asymmetry for public market investors. The financial health, spending velocity, and internal project management of these firms are black boxes.

A delay reported at Oracle for an OpenAI project creates a ripple effect of doubt that impacts every public company in the supply chain, from Nvidia to Broadcom. Investors must now price in this "partner opacity risk." The staggering growth projections for AI hardware are not just dependent on technology, but on the financial and operational execution of a handful of private firms whose books are not open for inspection. This is a material risk that has been under-appreciated until now.

The Bottom Line: Re-evaluate Your Premiums

For sophisticated investors, the message is clear: the era of unconditional belief in high-multiple stocks is being tested. Perfection is now the baseline expectation.

For Broadcom (AVGO) Holders: The sell-off may prove to be an overreaction, given Hock Tan's strong track record. However, the stock is now saddled with a new risk premium tied to its custom-chip clients' opacity. This is a "hold and demand clarity" situation. Monitor management's commentary on AI margins in the coming quarters.
For Costco (COST) Holders: The concerns are more fundamental and warrant deeper scrutiny. The valuation premium is no longer guaranteed. Investors should treat the renewal rate issue not as a minor detail, but as a leading indicator of the health of its core business moat. A lower valuation may be the new normal until execution improves.

This is the time to audit your portfolio. Identify stocks with elevated multiples and ask the tough questions: Is their premium justified by flawless execution, or is it propped up by a narrative that is beginning to fray?