Soft power vs. hard power

Since that fateful day you heard “ChatGPT” for the first time, the AI trade has primarily been about the “picks and shovels” of the tech boom: hardware. But now, investors are learning not to underestimate the AI boom’s soft power.

Today, we got earnings reports from hardware giant Broadcom, along with software player Snowflake. Despite the fact that both companies touted staggering sales growth, investors reacted completely differently to each of them.

Two paths diverged

Snowflake shares popped 16.55% today, the company’s highest close since 2021, after the company told investors that its product revenue came in at $1.49 billion last quarter, surpassing Wall Street expectations of $1.42 billion. Shareholders were even more excited about the success of its vibe coding product, CoCo. Despite being haunted by SaaSpocalpyse fears, Snowflake has continued to prove the haters wrong and bank win after win.

“The key debate into the print was whether product revenue could keep accelerating. It did, and F3Q guidance implies further acceleration,” wrote Bank of America analyst Koji Ikeda in a note today, upping his price target on the stock from $395 to $470.

But while investors celebrated Snowflake’s winning streak, they were grading Broadcom on a curve. Despite the company projecting AI chip revenue doubling from $115 billion next year to $230 billion in 2028, shares plummeted 2.74% today.

The reason was the company’s forward-looking guidance. Broadcom said revenue would come in at $34.8 billion for the current quarter, which is slightly above analyst projections of $34.7 billion. But given the sky-high bar that analysts had for the company, even an A became a B-.

Yet despite a lukewarm quarter, most analysts expect Broadcom to still be among the AI winners in the long term. “Networking remains strong, and no news is good news on the gross margin front,” explained Morgan Stanley equity analyst Joseph Moore in a note today, in which he upped the company’s price target from $502 to $505.

Two sides of the same coin

Today’s reaction to two overall very positive earnings reports underscores an ongoing debate among investors: How much of the gains from the AI boom will come from the companies that build the infrastructure, versus those that actually make products?

As we learned today, predicting which companies AI will be a boon for and which ones the new technology will eventually put out of business—isn’t easy.—LB