• Broadcom is capitalizing on the AI boom by providing custom chips to major players like OpenAI, Apple and Google.
  • Instead of directly competing with Nvidia, Broadcom strategically complements the big companies in AI by offering specialized chips for specific tasks.
  • Broadcom’s robust growth in earnings and strong partnerships suggest the premium on its stock may be justified. 


Artificial intelligence is driving the next wave of technological innovation, and Broadcom (AVGO) is establishing itself as a key player in this transformative era. Its custom-designed chips are powering the AI infrastructure of industry leaders like Alphabet (GOOGL) and Apple (AAPL). But unlike Nvidia (NVDA), which dominates with high-performance GPUs, Broadcom is carving out its own niche by providing specialized chips that enhance and optimize AI models. This strategic positioning is enabling Broadcom to capture an increasing share of the rapidly expanding AI chips market, which is expected to grow from around $70 billion in 2024, to more than $90 billion in 2025.


Broadcom has built a strong foundation with consistent growth in earnings and a clear focus on capturing the AI-driven revenue boom. Still, its elevated stock price compared to industry peers gives some investors pause. Throw in the company’s heavy reliance on a small pool of hyperscale clients and its exposure to geopolitical uncertainty, particularly in China, and its status becomes more complex. Today, we delve into Broadcom’s strategic positioning in AI and assess the opportunities and risk investors should consider.


Occupying a critical niche


Broadcom, a prominent player in the tech industry, has deep exposure to the semiconductor, networking and telecom sectors. It designs and supplies a broad range of products, from semiconductors for wireless communications to networking components, making it a critical player in the infrastructure of the modern digital world. While Broadcom is often associated with telecom because of its key role in networking and broadband, its growing presence in other high-tech sectors, especially artificial intelligence (AI), is reshaping its image as a diversified tech company.


The company has been selected by major players like OpenAI and Apple to provide custom AI chips, marking a notable shift in its product portfolio. Broadcom’s chips are being used in data centers, cloud computing and AI applications, with a focus on interlinking components and enabling faster, more efficient processing. The company’s ability to produce critical technologies, such as fiber-optic connections and server interlink technology, positions it as a strong contender in AI alongside Nvidia, albeit with a different role. While Nvidia remains the go-to player for AI-specific GPUs, Broadcom’s hardware helps optimize the infrastructure that supports AI models, making it indispensable for broader use in AI.


Besides working with OpenAI and Apple, Broadcom’s relationships with other tech giants help solidify its position. For instance, it already manufactures custom AI chips for Google Cloud and Meta Platforms (META). These partnerships are critical for Broadcom because they enable the company to tap into the vast potential of AI-driven growth. Its ability to secure contracts with major players helps capture a larger share of this rapidly expanding market.


Another key development was Broadcom’s partnership with Japanese semiconductor firm Rapidus, which will supply Broadcom with cutting-edge 2-nanometer chips. Rapidus is backed by industry giants like Toyota, Sony and SoftBank, making it competitive with global chip manufacturers like Taiwan Semiconductor (TSMC). By securing access to these advanced chips, Broadcom ensures it can meet escalating demand for the high-performance components needed in data-intensive technology. This collaboration also underscores Broadcom’s global reach and its ability to strategically leverage partnerships to fuel its growth.


Filling the AI gap with custom chips


Broadcom’s approach to AI differs from Nvidia’s, which represents a key competitive advantage. While Nvidia is recognized as the leader in AI chips, especially with its GPUs used in large-scale data centers for AI training and inference, Broadcom’s focus is more on custom AI chips tailored to specific customer needs. Broadcom specializes in application-specific integrated circuits (ASICs) designed for specific workloads, which offer greater efficiency and performance for those use cases. 


This difference in focus gives Broadcom a special advantage because the company provides complementary technology to other AI firms instead of competing with them for market share. For example, Nvidia’s GPUs are highly versatile, capable of handling a wide range of AI workloads, while Broadcom’s custom chips, like the tensor-processing units (TPUs) developed for Google, are optimized for specific tasks. By specializing in custom AI chips, Broadcom has sidestepped direct competition with Nvidia, carving out a niche as a key supplier for hyperscalers in need of specialized, high-performance chips. As a result, both Broadcom and Nvidia appear ready to capitalize on continued growth in the AI sector, each playing a distinct, yet essential, role.


Broadcom’s earnings showcase its success in AI


Broadcom’s Q4 2024 earnings report presents a company thriving amid the AI revolution, demonstrating growth in both revenue and profits. In Q4, the company exceeded earnings expectations with adjusted earns per share (EPS) of $1.42, surpassing the consensus estimate of $1.38. Similarly, revenue reached $14.05 billion, which was in line with the $14.09 billion forecast. Despite the slight revenue miss, net income rose by 23% year-over-year, reaching $4.32 billion, or $0.90 cents per share, up from $3.52 billion, or $0.83 cents per share, in Q4 of 2023. These figures suggest that Broadcom’s financial position is strengthening. 

Another highlight of Q4 was the company’s AI-driven semiconductor revenue, which saw a 220% year-over-year increase, reaching $12.2 billion for the year. The surge in AI-related sales reflects the broader boom in generative AI infrastructure, with Broadcom playing a pivotal role in providing essential components, including networking parts for AI systems. The semiconductor division, which includes Broadcom’s AI chips, reported $8.23 billion in revenue, a 12% increase from the same period last year, showcasing the company’s growing footprint in this high-growth area. While this sector continues to drive Broadcom’s growth, non-AI semiconductor revenue is expected to decline slightly, indicating the company’s fortunes are increasingly tied to AI


Broadcom’s infrastructure software division also saw meaningful growth in Q4, with revenue climbing 41% year-over-year to $5.82 billion, driven largely by its acquisition of VMware. This blend of AI-driven growth and expansion in infrastructure software positions Broadcom for continued success. However, the company’s reliance on AI for growth does introduce some risk. But considering AI revenue is poised to remain a primary growth driver, Broadcom’s future continues to look promising.


Overall, Broadcom’s Q4 2024 earnings show the company that’s not just riding the wave of AI growth, but actively shaping its own foundation. Despite potential challenges in non-AI semiconductor revenue, Broadcom’s impressive performance in AI chips, its strategic alliances with top cloud players and its optimistic guidance point to a company poised to lead the charge in AI infrastructure for years to come.

Is Broadcom’s premium valuation justified?


Over the past 52 weeks, Broadcom’s stock has been a standout performer, climbing more than 100% and currently trading about $230 per share. Based on that level of return, it’s evident investors are betting on the company’s strong AI growth prospects. This optimism is reflected in Wall Street’s outlook as well—none of the 44 analysts covering Broadcom rate it “underweight” or “sell,” with 38 offering a “buy” or “overweight” rating. And the average price target for the stock is close to $250 per share, suggesting analysts see upside potential at today’s levels.


To understand Broadcom’s valuation, its P/E ratios provide important context. The company’s non-GAAP P/E ratio for the trailing 12 months (TTM) stands at 46, about 90% higher than the sector median, which reflects investor confidence in its earnings power. However, its GAAP P/E ratio is markedly higher, at 174, because of the impact of non-recurring costs and stock-based compensation. While this higher GAAP P/E ratio may make Broadcom appear expensive compared to other semiconductor firms, the non-GAAP figure arguably offers a more accurate reflection of its core business performance and aligns more closely with industry norms.


Looking ahead, Broadcom’s guidance for Q1 2025 reinforces its positive momentum. The company expects consolidated revenue of approximately $14.6 billion, reflecting a 22% year-over-year increase, with semiconductor revenue projected to grow by 10%. AI-related semiconductor revenue is expected to rise by 65%, further solidifying Broadcom’s leadership. The company’s strong positioning is highlighted by its work on custom AI chips with three major cloud customers, which are each expected to deploy 1 million AI chips by 2027.


Broadcom’s growth potential still relies heavily on a small group of hyperscale customers, such as Apple and OpenAI. This concentration means any shifts in their spending priorities or delays in their projects could negatively affect Broadcom’s financial outlook, making its valuation more sensitive to changes in this narrow customer base. However, if Broadcom can further diversify its customer portfolio, it would not only reduce this risk, but also provide a potential catalyst for further valuation growth.


Why shares of Broadcom look compelling at this time


Broadcom’s story is one of opportunity and strategic foresight. With solid earnings, an upbeat outlook and a growing presence in AI, the company appears to represent an attractive investment opportunity. What makes Broadcom especially compelling is that it’s not competing head-to-head with Nvidia, but instead carving its own path by offering innovative products and services for hyperscalers—allowing it to capture a considerable slice of the AI market where demand for tailored, high-performance components is surging.


While Broadcom’s valuation might be higher than some of its peers—not unusual for high-growth tech companies—the company’s dominant position in the AI sector makes this premium feel well-earned. With a growth trajectory fueled by expanding AI semiconductor revenue and infrastructure software, Broadcom is set for long-term success. Add the overwhelmingly bullish sentiment among analysts, and it’s clear the market sees strong upside ahead.


While risks do exist—particularly reliance on a narrow group of hyperscale customers and exposure to geopolitical tensions, like those with China—the company’s favorable strategic positioning and strong customer relationships provide a solid foundation for investment. Should the stock take a dip, it could offer an even more enticing opportunity for investors looking to enter at more favorable levels. In sum, Broadcom shares look like they fall somewhere between a “hold” and a “buy,” for investors with a favorable outlook on the U.S. economy. 

Andrew Prochnow has more than 15 years of experience trading the global financial markets, including 10 years as a professional options trader. Andrew is a frequent contributor Luckbox magazine.

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