Broadcom and Oracle stock have dropped over 15% despite surpassing earnings expectations. Investor concerns about rising costs and margin pressures, alongside increased spending on AI-related infrastructure, have led to the selloff. Both companies heavily rely on AI, but questions remain about the profitability of their investments in data centers and AI clusters.

Broadcom reported a 28% increase in quarterly sales to $18.01 billion, with EPS up 37% to $1.95. However, the stock fell as the company warned of lower gross margins due to costly infrastructure buildouts for AI. AI semiconductor revenue surged 74% year over year, but lack of CapEx guidance disappointed investors.

Oracle’s Q2 earnings rose 54% to $2.26 per share, but sales of $16.05 billion missed estimates. The company plans to increase CapEx by $15 billion next year, raising doubts about sustainability. Strong cloud and AI pipelines are overshadowed by concerns about the impact of debt financing on profitability.

Investor focus now shifts to the valuations of Broadcom and Oracle. Despite recent drops, their P/E ratios are in line with industry averages. However, Broadcom’s price-to-sales ratio of 26X is concerning compared to the industry average of 5X, while Oracle’s 8X ratio is closer to the industry average of 4X. Both stocks hold a Zacks Rank #3 (Hold).

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Read more at Nasdaq: Buy the Drop in Broadcom or Oracle Stock After Earnings?