Broadcom's Insider Selling: A Big Red Flag, or Business as Usual?

Key Points

• Broadcom’s share price hit an all-time high on Dec. 10, but plummeted after its earnings report released the next day.
• Late-December insider selling looks worse than it is because many sales were “sell-to-cover” transactions tied to restricted stock unit vesting and tax withholding. 
• CEO Hock Tan’s $42.4 million sale stands out, but filings indicate it was connected to an exchange fund diversification move, not a clear negative call on the business

Recent events have rattled investor confidence in semiconductor giant Broadcom NASDAQ: AVGO. The company’s latest earnings release led to a dramatic sell-off.

After reaching an all-time closing high of around $412 on Dec. 10, shares dropped as much as 21%, closing near $325 on Dec. 17. By the Dec. 26 close, the stock had recovered moderately to around $350.

However, concerns linger around the company’s gross margins going forward, a dynamic that seems to be keeping a lid on Broadcom’s share price.

Adding to the uncertainty is a burst of sales from Broadcom insiders in late December. At a time when Broadcom shareholders could use a boost in confidence, several Broadcom insiders are selling. Let’s break down these insider moves and gain clarity on how concerned investors should be. 

Why Broadcom Insider Sales Appear Concerning

Since it released its earnings on Dec. 11, Broadcom has seen eight separate insider sales, worth approximately $66.7 million in total. The vast majority were not made under a predetermined 10b5-1 plan. Insiders must schedule 10b5-1 sales well in advance of when they actually take place, greatly limiting their utility in reacting to recent developments. Therefore, 10b5-1 plan sales don’t provide much of a near-term bearish signal. In contrast, sales not made under these plans are much more likely to provide a pessimistic signal in the near term.

$66.4 million, or 99% of the value of Broadcom’s recent insider sales, did not come under a predetermined plan. This suggests that these insiders may have made these sales in reaction to Broadcom’s latest report and the ensuing sell-off. At first glance, these sales certainly appear worrisome. However, a key detail of these sales pushes back on this interpretation significantly.

Insider Sale Impetus: RSU Requirements and CEO Diversification

The Form 4 SEC filing provides details on the reasoning behind every insider sale. In six out of the seven non-105b-1 sales, the following disclosure appears:

“Shares were sold through automatic transactions to cover withholding taxes due upon the vesting of restricted stock units ("RSUs") as required under the relevant RSU awards.”

This means that despite not coming under a 105b-1 plan, these sales were not discretionary. They covered the taxes incurred from these insiders' vested RSUs. RSU awards are a type of stock-based compensation.

Employees must continue working for their company through the RSU vesting period to actually receive these stock awards. Once this happens, employees incur a tax liability, which, in Broadcom’s case, is automatically covered by selling some of the stock they were just awarded.

Thus, sales made for this purpose do not provide a bearish signal, as they are simply a formality.

About $24 million worth of Broadcom’s recent sales, coming from three insiders, fall into this category. That leaves us to reconcile Hock Tan’s $42.4 million sale.

Hock Tan’s Sale Stands Out, but the Structure Matters

Tan sold 130,000 shares, leaving him with 1,078,474 shares after the transaction. This includes 595,638 shares owned indirectly through a trust and 482,836 shares owned directly. Doing the math, Tan reduced his total position in Broadcom by around 11%.

While a significant reduction in his position, investors should review the notes of his Form 4 filing, which state, “The reporting person contributed shares into an exchange fund.” This suggests that Tan made this sale to diversify his portfolio, selling Broadcom to buy an ETF. This dampens the bearishness of his sale.

AVGO Insiders Aren’t Panicking; Neither Should Investors

Broadcom’s recent insider sales, although significant, should not deter investors. Tan’s sale is the only one that is potentially worrisome, as an 11% decline in his position is meaningful. However, Tan still maintains a massive position in Broadcom. His artificial intelligence-influenced pay package is expected to significantly increase his position over the coming years, assuming Broadcom’s success continues. Thus, it is not alarming to see him moderately diversify his holdings.

One More Data Point: A Small Insider Buy

On the other side of the ledger, Broadcom director Harry L. You reported buying 1,000 shares on Dec. 18 at roughly $325.13. It’s not a huge purchase relative to Broadcom’s market cap, but it does matter as a signal: insiders rarely buy for administrative reasons.