I’ve made Broadcom Pick #3 in my Special Report on my subscription set JubakAM.com. And today I’m adding it to my long-term 50 Stocks Portfolio.
Here’s what I wrote:
Pick #3 is Broadcom (AVGO) As AI chips and systems get more powerful, someone has to build the chips and systems to network it all. In the just reported quarter networking revenue grew by 44% year-over-year to reach $3.8 billion and now represents 53% of segment sales. Networking demand was driven by both AI networking and an increasing large business in custom silicon for customers such as Alphabet. Networking revenue grows in tandem with spending on GPUs for AI data centers with networking spend estimated at around 20-30% of GPU spend for AI data centers. Broadcom makes the networking switches, PCIe switches, and network interface cards that stitch AI systems together. With a leading position in the demand for faster connection speeds, management expects the release of the 100 terabit Tomahawk 6 networking switch by late 2025, to keep the company comfortably ahead of the competition. According to the company, 7 of the largest 8 AI clusters use Broadcom Ethernet solutions. Broadcom expects AI revenue of $11 billion for fiscal 2024.
The other source of AI revenue growth for Broadcom comes from the expansion of Broadcom’s customer silicon business. It’s hard to get a precise read on the timing of potential revenue from the AI custom chip segment at Broadcom. We know that Broadcom has co-designed multiple generations of Google’s Tensor Processing Unit (TPU) AI chips, including the latest TPU v7. That chip is expected to generate revenue for Broadcom through 2026-2027. Broadcom supplies Google with custom AI computing engines as well as networking technologies to scale out Google’s AI clusters.
From there though things get a bit vaguer. Meta is expected to become a major customer for Broadcom’s custom AI chips over the next two years as Meta builds out its AI computing infrastructure. Broadcom is also believed to be collaborating with Microsoft on Microsoft’s Maia AI chip. Analysts speculate that Broadcom could be working with Amazon on Amazon’s Inferentia AI chip and 5 nanometer Tranium chip. Broadcom added a new major customer for its AI chips in March 2024, and analysts believe that customer is either Amazon, Apple, or ByteDance. Broadcom is aiming to be the leading supplier of custom AI silicon. (Don’t want to be totally dependent on Nvidia? We’ll design a chip for you,) Analysts project the custom silicon business could generate over $10 billion in AI chip revenue in 2024 and up to $20 billion by 2026.
Broadcom isn’t without its problems. The company’s 5G chips are an important source of future growth but slowing sales in smartphones, particularly Apple’s iPhone, have pushed that future down the road a bit. The company’s legacy software business saw revenue decline by 15.7% year-over-year in the second quarter of fiscal 2024.
All in all, though, especially with a 10-1 stock split, effective July 15, on the horizon, I’d buy Broadcom even at this price as one of my three core AI stocks from the current generation of leaders. I’m adding it today to my long-term 50 Stocks Portfolio.
