The market is currently buying into Broadcom’s prediction that demand for chips that power AI will skyrocket.
Following CEO Hock Tan’s statement that artificial intelligence (AI) might offer $60 billion to $90 billion in revenue potential in 2027—more than four times the current market size—the company’s shares jumped 21% on Friday, bringing its new tab valuation to $1 trillion.
On Thursday, Broadcom also reported first-quarter revenue that was higher than anticipated.
According to several experts, estimating the market’s growth and Broadcom’s prospective share was challenging; TD Cowen said that the prediction is “difficult to prove/disprove, but is huge.”
Broadcom, which manufactures bespoke chips for significant cloud companies, has benefited greatly from Big Tech’s efforts to expand beyond Nvidia’s and with an expensive and limited supply of AI processors.
Amidst concerns regarding the return on AI expenditures for the broader tech sector, investors have also supported chipmakers already reaping the benefits of the enormous data centers being constructed by companies like Microsoft and Meta.
On Thursday, Broadcom CEO Tan announced that the business had secured two significant hyperscaler clients after generating $12.2 billion in AI sales for the fiscal year 2024.
That was a significant portion of the $15–20 billion total serviceable market forecast.
According to TD Cowen analysts, based on its predicted 70% market share in 2024, Broadcom could potentially capture up to $50 billion in AI sales from the entire 2027 opportunity.
However, they cautioned that it was challenging to forecast the company’s share because chips from companies like Nvidia might be part of the serviceable market.
Hans Mosesmann, an analyst at Rosenblatt Securities, projected a significantly smaller market share for Broadcom in 2027, ranging from 20% to 50%.
Meanwhile, the stock that trades at a lower multiple than competitors was snatched up by investors.
According to data gathered by LSEG, Broadcom’s 12-month forward price-to-earnings ratio is 29.8, while Nvidia’s, the first chip company to reach $1 trillion in market value, has a ratio of 31.03.
An increasing number of chip vendors will outperform Nvidia as AI moves from training models to inference. Thomas Hayes, the chairman and managing member of Great Hill Capital, stated that Broadcom is the canary in the coal mine.
Laptops 1000While Broadcom’s smaller rival Marvell had an almost 9% increase in shares, Nvidia and rival AI chipmaker AMD saw a roughly 3% decline. TSMC, a contract chipmaker, increased by 4%.
As of the latest close, Nvidia’s stock had more than doubled, while Broadcom’s shares had increased by more than 60% this year.
The increases outpace those of the main cloud giants, with Alphabet, which analysts believe to be Broadcom’s largest custom chip customer, increasing 40%, and Microsoft up roughly 11% this year.
“They (Broadcom) went out of their way to give investors a reason to dream,” Stacy Rasgon, an analyst at Bernstein, stated.
Rasgon remarked, “The AI story seems to be coming into its own; perhaps Hock might think about shopping for a leather jacket,” alluding to the distinctive fashion of Jensen Huang, the CEO of Nvidia.
