AI giants surge, it's Broadcom's turn!

Recently, Nvidia's stock price has continued to soar, becoming the company with the highest market value in the world. At the same time, Huang Renxun has cashed out about 32 million US dollars by selling shares. In the wave of AI, Nvidia has been pushed to a peak.

Although not as famous as Nvidia, Broadcom is a player who makes a lot of money quietly under AI. Against the background of major technology giants building data centers, Broadcom provides a series of components for computing and networking, including components that are crucial to data centers, which makes it also make a lot of money from this wave of AI.

Broadcom's latest financial report and annual forecast exceeded expectations, and the company's stock price has soared by 17% in the last three trading days, with a market value increase of 111.7 billion US dollars (about 812 billion yuan), and the latest market value has broken through the 800 billion US dollar mark, reaching 839.1 billion US dollars.

After the surge, is it possible for Broadcom to impact the market value of 1 trillion US dollars?

01

Under AI, Broadcom is crazy

Let's take a look at Broadcom's financial report.

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Not long ago, Broadcom released its second quarter financial report. The net revenue in the second quarter was 12.487 billion US dollars, exceeding the 12.057 billion expected by analysts, and increased by 43% compared with the 8.733 billion US dollars in the same period last year.

In the entire fiscal year ending in October, the company's revenue is expected to reach about 51 billion US dollars, slightly higher than the 50.6 billion US dollars previously expected by analysts, and also higher than the nearly 50 billion US dollars expected by Broadcom earlier.Broadcom is the leader in the communications chip industry, with its business mainly divided into two major areas: semiconductor solutions and infrastructure software. It holds a leading position in multiple fields such as switching chips, Wi-Fi chips, and FC SAN, among which, in the Ethernet switching chip field, Broadcom ranks first with about 70% of the global market share.

The semiconductor solution products are mainly wired and wireless communication chips, contributing to 58% of the revenue, with network, wireless, storage, broadband, industrial, and automotive accounting for 53%, 22%, 11%, 10%, and 4% respectively.

Infrastructure software contributes 42% of the revenue, mainly composed of acquired companies, such as Brocade, which provides storage area networks, Symantec, an internet security technology company, CA Technologies, a computer information technology management software company, and VMware, a software and service provider for cloud computing and hardware virtualization.

Looking at Broadcom's financial report for the second quarter of the fiscal year 2024, the revenue from semiconductor solutions is 7.2 billion, a year-on-year increase of 5.8%, and the revenue from infrastructure software is 5.285 billion, a year-on-year increase of 174.5%.

In the second quarter of Broadcom's fiscal year 2024, its AI revenue reached 3.1 billion, a year-on-year increase of 280%. The main growth driver is its AI network products, achieved through cooperation with major network suppliers such as Arista Networks, technology companies, and Super Micro.

Looking back at the history of Broadcom's development, it entered a rapid growth phase after the fiscal year 2013, with a compound annual growth rate (CAGR) of 33.17% in revenue from 2013 to 2022. At the same time, 2023 was the first year when Broadcom significantly benefited from the empowerment of AI-related businesses. Broadcom stated that the sales of Ethernet devices used for generative AI business last year increased from 200 million to over 800 million.

Recently, Broadcom even predicted that the overall AI revenue in the semiconductor department will exceed 10 billion in 2024, accounting for more than 35% of the semiconductor department's revenue.

Like NVIDIA, Broadcom also announced a stock split of 10 to 1, which will start trading at the adjusted split price on July 15th. After the announcement, Broadcom's stock price continued to rise, setting a historical high. As of the closing of the US stock market on the 17th, Broadcom reported 1,828.87 US dollars, a surge of 5.41%, with a total trading volume of 8.7398 million shares and a transaction amount of 15.868 billion US dollars.

Under AI, Broadcom is going crazy.Translation of the provided text:

Battling NVIDIA's Ace in the Hole

Let's take a look at Broadcom's products next.

Broadcom has two aces up its sleeve in AI: one is the artificial intelligence accelerator, also known as the XPU. These accelerators are similar to GPUs, NPUs, LPUs, and other processors introduced by companies like NVIDIA and AMD, but the difference lies in Broadcom's custom "XPU" tailored for its customers. The other is the need for high-speed connections with the emergence of GPUs, NPUs, and LPUs, which is precisely Broadcom's "bread and butter."

XPU: Demand for 1 Million GPU AI Clusters

Regarding AI accelerators, Broadcom is very rational.

When asked if there would be fierce competition with NVIDIA's Blackwell product, Broadcom stated: "As we all know, GPUs are the preferred AI accelerators in commercial environments. This model is extremely powerful and is an area where NVIDIA excels. They have performed exceptionally well in this area, and we do not consider competing with them in this field at all, as it is their strong suit."

In fact, from the beginning, Broadcom has been distancing itself from "GPU" (NVIDIA's promotional name), constantly emphasizing that AI accelerators can be GPUs, NPUs, TPUs, and other "X"PUs.

Broadcom believes that for some very specific or selective hyperscale customers who want to customize their own AI chip solutions, Broadcom is more than happy to use its own IP to help customize ASICs, and AI accelerators will definitely transition to custom chips in the future.

Currently, the industry's demand for XPUs is growing like a snowball.Broadcom's Chief Operating Officer gave an example: Two years ago, the most advanced cluster had 4,096 XPUs, each with only a few hundred watts, and it was quite simple to interconnect 4,000 of them using Tomahawk switches through a single-layer network layer. Now, Broadcom has built clusters with more than 10,000 XPU nodes, requiring two layers of Tomahawk or Jericho switches. Broadcom's goal is to expand this number to over 30,000 by 2024, and ultimately reach 1 million.

Looking at the latest XPUs unveiled by Broadcom, they have 12 HBM stacks, reaching the limit of TSMC's CoWoS-S packaging, surpassing Nvidia's Blackwell with 8 HBM stacks. In addition, when building clusters, Broadcom has also been emphasizing that its XPUs consume less than 600 watts, making them one of the most energy-efficient accelerators in the industry.

Currently, Broadcom's XPU services already have three customers.

The first one needs no introduction, it is Google. The TPU co-launched by Broadcom and Google has always been a focal product in the market. Google has now released the sixth-generation chip Trillium, and in the data center market, Google TPU accounts for 20% of the market share.

Broadcom did not disclose the second and third customers. Some speculate that the second customer is Meta, as Meta has been a customer of Broadcom for the past four years, and the two companies have cooperated to build multiple generations of products, which have now been mass-produced.

There are various opinions on the third customer, and many analyses believe that this "mysterious buyer" is likely ByteDance. The reason is that it has a large network and has adopted Broadcom's on-chip neural network inference engine. It is also a large consumer-oriented social network that can quickly get a return on investment by using more customized chips instead of commercial chips. In response to this, Broadcom has not yet responded, only hinting that it is from a large consumer-level AI company.

By 2024, 35% of Broadcom's semiconductor business revenue will come from AI, which includes not only the mass production of customized ASIC solutions for the two major customers but also the mass production of products related to the new third customer this year.

The rise of Ethernet switch chips

When more than a hundred GPUs are needed, the only way to connect them is through a network, which also confirms an old saying: the network is a computer.

Analysts on Wall Street all believe that Broadcom is very likely to become the next member of the trillion-dollar club in the US stock market. The reason behind this is that it sees the Ethernet network as an important growth driver.What is the relationship between Ethernet and AI?

Networking devices represented by switches are an important part of AI computing hardware. In AI training, due to the need for high-speed data transmission between GPUs, network cards, and memory, the industry has invented a technology called RDMA, which allows the network card to take over the data and directly transmit data between the sender and receiver's memory, bypassing the cache and operating system. Both NVIDIA-led IB (InfiniBand) and Ethernet support RDMA.

As the complexity of large models increases, there has always been a divergence in the deployment of large-scale AI clusters, that is, the debate on the technical path between Infiniband and Ethernet. In terms of investment, the essence behind the debate is whether to choose NVIDIA or Broadcom.

The cost of IB networks is significantly higher than that of Ethernet. It is bound to NVIDIA's complete set of solutions, and network cards, switches, fiber optics, and optical modules must all be purchased from NVIDIA, with the overall cost reaching 5-10 times that of Ethernet.

Ethernet supporters believe that being cheap is the hard truth. Ethernet does not need to be bound to NVIDIA, and the network can be self-optimized to achieve similar performance to IB.

In competing with NVIDIA's Spectrum-X Ethernet networking platform, Broadcom's senior executives said in an interview that NVIDIA's new platform is "lacking innovation" and emphasized that Broadcom has already launched a similar solution. Currently, 7 out of the top 8 AI chip clusters have deployed Ethernet infrastructure supported by Broadcom's technology, and it is expected that all ultra-large-scale AI clusters will be supported by Ethernet next year.

In addition, in the market, high-end Ethernet switch chips have become very popular this year. Since the first quarter, the prices of several switch chips in Broadcom's Tomahawk4 series have risen rapidly, most of them showing no stock on their official website and other trading platforms, and the delivery period is up to 50 weeks, among which the market quote for BCM56990B0KFLGG has reached about 4,100 US dollars.

03

The shadow of Broadcom

Broadcom is rising step by step in the AI wave, but there are still some shadows "shrouded" above Broadcom.Although Broadcom's AI revenue continues to grow, by the fiscal year 2024, the AI business will only account for 20% of total revenue, and Broadcom still has many legacy business lines.

If we calculate the growth of Broadcom's other businesses, excluding the impact of the acquisition of VMware and AI growth, it can be found that the revenue of the remaining businesses decreased from $7.9 billion in the second quarter of the fiscal year 2023 to $6.6 billion in the second quarter of the fiscal year 2024, a year-on-year decrease of 15.7%.

Broadcom's past acquisitions have all focused on traditional software businesses.

In fact, the industry believes that Broadcom's acquisitions of CA Technologies and Symantec were not wise moves. CA Tech serves the traditional mainframe market, while Symantec's competitive edge is being replaced by new cybersecurity companies such as Palo Alto, CrowdStrike, and Zscaler. Symantec is at a disadvantage in some rapidly growing markets, such as endpoint security, cloud, and identity security.

On the other hand, in the first full quarter after Broadcom's acquisition of VMware, VMware's quarterly revenue plummeted by $580 million (4.208 billion yuan). After successfully acquiring VMware, Broadcom began to carry out large-scale layoffs, significantly increase product license prices, and remove perpetual licenses in favor of a subscription model.

Many enterprise customers purchase VMware's data center virtualization because of its perpetual licensing model, which does not require continuous payment for virtualization services. With the change to a subscription model, there is a potential risk of renewal for VMware's existing customers.

Although VMware's revenue has declined, Broadcom's CEO Hock Tan still stated: "Broadcom is making good progress in transforming all VMware products to a subscription licensing model, and 3,000 of VMware's 10,000 largest customers have already signed multi-year agreements."

He also plans to continuously increase VMware's annualized bookings value (a measure of long-term contract commitments), from $1.2 billion in the previous quarter to $1.9 billion in that quarter.

He added that Broadcom sees customers being "very interested" in VMware's product portfolio, using VMware products as a means of building local private clouds, "as a good complement to public clouds, and even potentially replacing public clouds or being mixed with public clouds."Conclusion

Following Broadcom's impressive earnings report, Bank of America believes that there is still greater potential for Broadcom. In a recently released report, Bank of America analysts have raised the target price for the company to $2,000, which implies that the stock could still rise by approximately 19% from its current level.

Currently, analysts expect Broadcom's revenue for the fiscal year 2025 to be $58.4 billion, with an adjusted net profit of $28.5 billion. Based on this calculation, even after a significant surge, Broadcom's forward price-to-earnings ratio is only 28 times, which is not exaggerated.

In summary, Broadcom is striving to achieve growth in areas such as custom artificial intelligence chips, Ethernet networking, and VMware add-on sales. From this perspective, Broadcom may have the potential to reach a market capitalization of one trillion dollars.