Broadcom (AVGO) has emerged as a leading player in the semiconductor industry, recently surpassing a market cap of $1 trillion. The company reported a significant 118% increase in its stock value this year, largely fueled by advancements in artificial intelligence (AI) technologies. This growth could position Broadcom to end 2024 on a strong note.
Broadcom surpasses $1 trillion market cap with AI growth
Broadcom’s strong performance has not reached the heights currently seen with Nvidia (NVDA), but a transformative shift in the AI-chip marketplace may bolster Broadcom’s prospects. During the Q4 earnings call, CEO Hock Tan disclosed ambitious revenue forecasts for the next two years, reflecting the changing dynamics within the AI chip sector. The rise of specialized chips, particularly eXtreme Processing Units (XPUs), is altering the competitive landscape, moving attention away from Nvidia’s general-purpose GPUs.
Broadcom stock climbs 13%: The AI boom investors can’t ignore
The heightened demand for chips has principally benefited Nvidia over the past two years, as it remains the dominant provider for companies developing large language models (LLMs). Nvidia’s GPUs are integral to numerous AI systems due to their unmatched processing power and efficiency. Until now, no competitor has successfully produced GPUs that can rival Nvidia’s performance. However, Tan pointed out that the industry may be favoring custom silicon solutions like Broadcom’s XPUs, which cater more directly to specific, high-performance use cases, particularly in AI and machine learning.
XPUs, unlike traditional GPUs, are specially designed to handle distinct computing tasks effectively. Broadcom’s Q4 report indicates that these specialized chips might be gaining momentum over their generalist counterparts, as businesses begin favoring these tailored solutions. Tan’s projections for Broadcom’s AI and AI networking markets suggest a revenue potential of $60 billion to $90 billion by 2027, a remarkable increase from the previous year’s estimate of $15 billion to $20 billion.
Tan attributes Broadcom’s strong AI prospects to its custom XPUs and AI networking solutions, mentioning a growing number of hyperscalers adopting these innovations. “Specific hyperscalers have begun their respective journeys to develop their own custom AI accelerators or XPUs,” Tan stated, pointing to partnerships with major cloud computing entities like Amazon Web Services, Google Cloud, and Microsoft Azure. He also noted that Broadcom is currently working with two additional hyperscalers to develop next-generation AI XPUs.
These developments raise questions about Nvidia’s market position amidst Broadcom’s ascendancy. A July 2024 report from All About Industries examined the implications of such shifts, noting that both custom silicon chips, such as XPUs and Application Specific Integrated Circuits (ASICs), have appropriate functions within the ecosystem. Despite concerns regarding Nvidia’s dominance, industry experts indicate that both XPUs and GPUs could find their place in a diversified market.
Ophir Gottlieb, CEO of Capital Market Laboratories, remarked on the complementary relationship between the two types of chips. “I think one type bolsters the demand for the other, and it’s a sort of a reinforcing cycle,” he told to The Street. He emphasized how companies that operate AI platforms on their proprietary software often benefit from building chips designed to work specifically with those systems. “When you have a custom software layer, you build the chips specifically to function with that software. And that’s why it’s more effective, it’s more efficient,” Gottlieb explained.
Broadcom’s recent Q4 earnings report reflects its success in capturing hyperscaler-specific workloads with its custom silicon. The company’s shares soared by 11% following its impressive earnings results, bringing their annual increase to 126%. Now priced at $250, Broadcom stands in contrast to Nvidia’s gains of over 165% this year, with Nvidia’s market cap reaching approximately $3.2 trillion. Broadcom’s growth can also be attributed to a dramatic increase in AI-related revenue, which reportedly surged 220% to $12.2 billion.
Profitability is further bolstered by recent price target adjustments from Wall Street analysts. Goldman Sachs has raised its 12-month target for Broadcom shares to $240 from $190, while Barclays and Truist have also revised their expectations upward. These analysts highlight the effectiveness of Broadcom’s management and its strategic acquisitions, particularly the $61 billion takeover of VMware completed in 2023.
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Featured image credit: Broadcom
