Broadcom Shares Surge as AI Demand Boosts Positive Outlook

By an anonymous author

Broadcom Inc. saw a significant rise in its stock prices after the company announced a promising forecast, indicating strong continued spending in the field of artificial intelligence (AI) computing. This positive outlook has helped to reassure investors about the company's future.

In a recent statement, Broadcom estimated its sales to be around $14.9 billion for the three-month period concluding on May 4. This figure surpasses the analysts' average expectations, which were around $14.6 billion, with some projections even suggesting numbers above $15.1 billion.

This news reflects that the surge in AI spending is still very much alive, and Broadcom is one of the key beneficiaries. The demand from its data center clients has driven them to invest heavily in new infrastructure, boosting Broadcom’s market position.

Last year, the excitement surrounding AI contributed to raising the company's market value to over $1 trillion. However, investor sentiment has become more cautious in recent months. Therefore, they are keenly looking for evidence that the growth in the AI sector is sustainable.

Broadcom’s report supported this need for reassurance. The company's CEO, Hock Tan, highlighted that AI spending was one of the primary drivers of growth during the first quarter, which concluded on February 2. He mentioned that revenue from AI-related areas is expected to reach $4.4 billion in the upcoming quarter.

Following the announcement, Broadcom's stock surged by as much as 6.7%, marking its largest gain in a month. As of Thursday, the stock closed at $179.45, although it remains 23% lower than the beginning of the year.

This positive performance stands in contrast to a disappointing earnings report from Broadcom's competitor, Marvell Technology Inc., released just a day earlier. Even though Marvell's revenues rose by 27% in the last quarter, their forecast failed to meet investor expectations, leading to a 20% drop in shares.

Broadcom reported a profit of $1.60 per share, excluding some items, with revenue up 25% to $14.92 billion for the fiscal first quarter. Analysts had expected earnings of $1.50 per share and revenues of $14.6 billion.

Although Broadcom manufactures a variety of chips, including essential connectivity components for devices like the iPhone, recent investor focus has shifted towards its custom design business. This division allows data center clients to create specialized chips to power AI software and services. Additionally, Broadcom has become a significant provider of software solutions for various businesses.

During a conference call with analysts, Tan spoke about the company's plans to increase production of AI chips tailored for large data center operators, often referred to as hyperscalers. He noted that Broadcom’s custom semiconductors could outperform general-purpose accelerator chips, similar to those made by Nvidia Corp..

Broadcom is also expanding its hyperscaler client base. It currently services three major clients in this category and is in talks with four more potential clients, two of which are nearing the point of generating revenue.

Tan affirmed that its hyperscale partners continue to invest significantly, indicating a promising outlook. However, it's important to note that these expansions are not included in the current market revenue forecast, which anticipates revenues between $60 billion to $90 billion by 2027 for this segment, hinting at even larger growth potential beyond expectations.

While Broadcom does not disclose its client names, industry analysts have suggested that its hyperscaler clients include Google, Meta Platforms, and the owner of TikTok, ByteDance. Tan also assured analysts that the new US regulations aiming to limit AI chip exports will not impact any of these clients.

Over the years, Tan has transformed Broadcom into one of the most valuable companies in the semiconductor industry through several strategic acquisitions. Notably, the software division is now nearly on par with its semiconductor operations, making Broadcom’s forecasts significant for understanding broad technology market trends.

In the recent call, Tan was questioned about the company’s potential interest in acquiring parts of Intel Corp. or other acquisitions. He indicated that his focus was primarily on expanding AI efforts and integrating VMware Inc., which Broadcom acquired for around $69 billion in 2023. “I’m too busy,” he remarked, stating that acquisitions are not currently on the agenda.

For the February quarter, Broadcom's semiconductor division posted a revenue of $8.21 billion, an increase of 11%, while software sales reached $6.7 billion, exceeding expectations.

Headquartered in Palo Alto, California, Broadcom produces components for various sectors, including automotive, smartphone, and internet access technologies. The company's expansion into software solutions covers products ranging from mainframe computers to cybersecurity and data center optimization.

Apple is one of Broadcom's primary customers. In earnings discussions, Tan often references the company using vague terms like "large North American customer" due to their complex relationship. There have been prior reports indicating that Apple plans to shift away from using a key wireless chip from Broadcom in the coming year, as it seeks to replace some supplier components with in-house versions, a trend that may also affect Qualcomm Inc.

In summary, Broadcom’s positive sales forecast is a reflection of ongoing robust demand within the AI space, underscoring the company’s significant role in this rapidly evolving technology landscape.

Broadcom, AI, Investor