Broadcom shares rally as $10 billion chip deal shows AI strategy paying off

[Daniel Nenni]

(Reuters) -Broadcom (AVGO) shares jumped 15% on Friday after the chipmaker unveiled a blockbuster $10 billion AI chip order from a new customer, fueling optimism around its ability to benefit from the generative AI race.

The deal solidifies the company's role as a leading custom chip provider amid Big Tech's push to diversify beyond Nvidia's pricey and supply-constrained artificial intelligence processors.

"While we agree Broadcom is taking more share, we believe the AI pie could just be getting bigger," BofA Securities analysts said.

The latest chip order could help reinforce investors confidence in the AI rally, which has shown signs of sputtering this year. Broadcom's shares are 32% higher this year after more than doubling in value last year.

If gains hold, the chipmaker would add more than $200 billion to its $1.44 trillion market valuation, after crossing the trillion-dollar valuation last year.

Broadcom's latest deal has fueled speculation that OpenAI (OPAI.PVT) is the unnamed customer. Analysts at J.P.Morgan, Bernstein and Morgan Stanley said the timing and scale of the deal suggest OpenAI is likely the new customer.

Reuters reported last year that OpenAI was working with Broadcom to build its first in-house chip.

OpenAI has so far used chips from Nvidia and AMD to power its AI models.

Shares of Nvidia (NVDA) and its smaller rival AMD (AMD), which provide off-the-shelf chips, fell 2% and 5% respectively.

Tech giants like Microsoft (MSFT), Amazon.com (AMZN) and Meta Platforms (META) - among Nvidia's largest customers - are all developing in-house chips.

While Broadcom does not identify the cloud companies it is developing custom chips for, analysts believe Alphabet's (GOOG, GOOGL) Google and Facebook-owner Meta (META) are among its existing customers.

Bernstein analysts said with this new customer, AI sales in fiscal 2026 could be well over $40 billion, up from expectations of $30 billion last quarter.

Broadcom said it expects "significantly improved" AI revenue growth in fiscal 2026.

Adding to momentum, CEO Hock Tan announced he would stay at the helm for at least five more years. Tan, who was 73 as of Broadcom's March proxy filing, has led the chipmaker for nearly two decades and steered it to the center of the AI boom.

https://finance.yahoo.com/news/wall-street-is-falling-in-love-with-the-corporate-breakup-heres-why-100035466.html

 

[benb]

AVGO is the new NVDA. Good for them.

 

[blueone]

I'm an AVGO stockholder, but the silliness they publish in their descriptions of their "AI chip business" makes me roll my eyes. These guys are what Intel used to call (in my time with them) a "back end team". They do design networking chips, storage chips, wireless chips, among several things, as Broadcom products, but they don't design AI chips for other companies at the digital level, and the contributions they make to these AI designs are unlikely to be very AI specific. The new $10B order is for an OpenAI XPU, better known as a smart NIC. Given Broadcom's networking expertise, I wouldn't be surprised at all if Broadcom was doing the entire design, but I do wonder how much the financial press really understands about Broadcom's "AI business". It makes me worry about the stock price, if the press had more understanding of Broadcom's actual contributions.

Their competitor in this market appears to be Marvell.

 

[ai268]

I'm an AVGO stockholder, but the silliness they publish in their descriptions of their "AI chip business" makes me roll my eyes. These guys are what Intel used to call (in my time with them) a "back end team". They do design networking chips, storage chips, wireless chips, among several things, as Broadcom products, but they don't design AI chips for other companies at the digital level, and the contributions they make to these AI designs are unlikely to be very AI specific. The new $10B order is for an OpenAI XPU, better known as a smart NIC. Given Broadcom's networking expertise, I wouldn't be surprised at all if Broadcom was doing the entire design, but I do wonder how much the financial press really understands about Broadcom's "AI business". It makes me worry about the stock price, if the press had more understanding of Broadcom's actual contributions.

Their competitor in this market appears to be Marvell.

Does Broadcom, "the chipmaker", just "design the circuit" or "make transistors"? Or "Intel Inside"?

 

[Barnsley]

Does this benefit their customers , the increased valuation?

 

[swka]

Does this benefit their customers , the increased valuation?

on paper yes, as they are integral part to make that chip work. one can even argue they are better than most in the business so they reduce the risk for their customer. But indeed, i agree with @blueone about the glorification of back end service they are putting out there

 

[bilau]

$10B AI racks. All goes to Broadcomm? And if so, all carry XPU gross margin?

 

[blueone]

$10B AI racks. All goes to Broadcomm? And if so, all carry XPU gross margin?

Not the racks, just the XPU chips, which means it's a huge chip order.

 

[bilau]

From Tomshardware:


As always, Broadcom isn't tipping its hat on the mystery customer. "Last quarter, one of these prospects released production orders to Broadcom, and we have accordingly characterized them as a qualified customer for XPUs and, in fact, have secured over $10 billion of orders of AI racks based on our XPUs," said Hock Tan, President and CEO of Broadcom, during the company's earnings conference call.

 

[blueone]

From Tomshardware:


As always, Broadcom isn't tipping its hat on the mystery customer. "Last quarter, one of these prospects released production orders to Broadcom, and we have accordingly characterized them as a qualified customer for XPUs and, in fact, have secured over $10 billion of orders of AI racks based on our XPUs," said Hock Tan, President and CEO of Broadcom, during the company's earnings conference call.

That's an interesting quote, though it could be read multiple ways. According to their website, Broadcom doesn't produce rack systems, they partner with Rackspace Technology. Rack system manufacturing isn't mentioned in their annual report either. (I just looked.) I hope I'm correct and this quote is Tan taking liberties with grammar, because the big stock price bump AVGO got this past Friday was said to be based on future AI chip sales being $10B, not a data center full of racks, which is a much lower margin business.

 

[bilau]

How much will the whole shebang be if the XPUs alone is $10B?

Also, Mr. Tan has done these corporate communication stuff for decades, he can't be throwing out actually quantified numbers in financial disclosures and not be very deliberate and rigorous.

 

[blueone]

How much will the whole shebang be if the XPUs alone is $10B?

Also, Mr. Tan has done these corporate communication stuff for decades, he can't be throwing out actually quantified numbers in financial disclosures and not be very deliberate and rigorous.

I have no idea, and I thought the original mention in the press was odd, with its lack of clarity, and then the information about OpenAI coming out.

The best XPU in the market, the Nvidia Bluefield 3 retails for about $3600, and to my knowledge is sold only as a PCIe card. I haven't seen the Intel IPU sold at retail, though some stories I've read coming out of Google (who "co-designed" the IPU) are not saying positive things about their deployment. Marvell has just announced an IPU. Microsoft makes their own, from the Fungible acquisition, MIPS cores and all. I'm not sure who does the back end work for it. Amazon hasn't mentioned XPU development, but it is interesting that their Annapurna Labs acquisition, which is responsible for their internal chip development, began as an XPU start-up. Assuming each Broadcom XPU has a fully loaded cost of $2000 (probably a low guess), $10B / $2000 is five million units. I'm not sure what to think, and when I read the original announcement I was skeptical about the $10B figure for just chips.

I don't mind saying that of all the individual stocks I own, I think about selling AVGO more than any other. I read too much hype from them to keep me comfortable. However, I do think being a back end team for in-house chip designers can be a very profitable and useful business to the big cloud companies. I'm wondering how Marvell will compare, who seems to be the back-end provider of choice for Microsoft.