Riding the AI wave, semiconductor giant Broadcom has joined the stampede of companies chasing Nvidia for a piece of the lucrative AI chip market. The computing and software conglomerate is up more than 66% in the past year, as it makes power moves to establish itself as one of the most dominant players in AI today. Broadcom has been making aggressive moves that have piqued the interest of analysts and investors, from buying VMware in a $61 billion deal to strengthen its data centre and cloud chops, to investments in AI chip R&D.
Central to Broadcomâs AI aspirations now is its fast-growing AI-connected chip business, which the company said it now forecasts will bring in an astounding $11 billion in revenue for fiscal 2024, up from a previous forecast of $10 billion. Combined with a 15% jump in Broadcom Inc shares recently, the upward revision reinforces the strong appetite for chips driving the rise of generative AI.
Morningstar analysts agreed in a note to Reuters that Broadcom remains âwe continue to see Broadcom as incredibly well-positioned to benefit from rising generative AI investment in the long term,â â a view widely held on Wall Street. A second explanation for the upswing in AI for Broadcom is essentially through buying or investing very well over the years.
They come as one of three planned spinoffs in Dellâs drive to become a full-fledged cloud computing firm with the $61 billion acquisition of VMware next year, which also added $50 billion to its market capitalisation, per FactSet data. In addition, Broadcom has been ramping up its own custom AI chip business, inking deals with tech giants including Alphabetâs Google and Meta Platforms.
In March, the company revealed that a third unidentified customer was using its custom AI chips, which gave its business credibility in this high-stakes industry. According to Reuters, âAt an investor conference on Wednesday, Broadcom said it will produce the new custom AI chips for âhyperscalerâ buyers that are mostly Alphabetâs Google and Meta Platforms.â
Diversified revenue streams and investor optimism
Broadcomâs software division, bolstered by the VMware acquisition, added $2.7 billion to its second-quarter revenue, further diversifying the companyâs revenue streams and positioning it as a formidable force in the AI ecosystem. The companyâs stock performance reflects this optimism, with shares surging 76% over the past 12 months and closing at a staggering $1,495.5 on Wednesday.Â
Broadcomâs recent announcement of a 10-for-1 stock split, a move reminiscent of Nvidiaâs strategy, is expected to further fuel investor enthusiasm. âItâs a sure-fire way to send your stock soaring,â Triple D Trading analyst Dennis Dick told Reuters, commenting on the stock split, adding that the move was âright out of Nvidiaâs book.â
Nvidiaâs dominance and competitive pressure
Broadcom is progressing, but Nvidia is still the leader in this space. For years, Nvidia has benefited from the first-mover advantage of producing AI chips that cater to a long tail of applications while favoring innovation over turning in big volume. While that balance appears to be in flux, Broadcomâs recent wins shed light on how the writing may be on the wall for a boom in AI now benefiting more than just one company.
This new contender has even forced Nvidiaâs CEO Jensen Huang to admit that âa resurgent Broadcom (and other start-ups) have planners at Nvidia nervous. Huang, for his part, stressed how the company must continue to innovate to ensure that it remains ahead of its peers. Nevertheless, competition has yet to make a dent on Nvidiaâs enviable lead in the AI chip market as the company busily cranks out its top-performing AI tech.
Broadcom vs Nvidia: The battle for AI chip supremacy
Unlike Nvidiaâs graphics processing units which have long dominated the industry, Broadcomâs custom AI chips â or application-specific integrated circuits â might offer a great business opportunity for tech giants with massive and steady-state AI workloads. These bespoke chips require considerable initial capital investment but they can offer large cost savings in both CapEx and power consumption, which sets them up as a more cost-effective (if less general purpose) option to Nvidiaâs.
Also bullish on Broadcom is Piper Sandler analyst Harsh Kumar, who writes, âWe continue to see [Broadcom] as the best AI play [excluding Nvidia] due to its strong positioning in the custom ASIC business along with its strong software portfolio.â
Broadcomâs multi-pronged strategy of pumping cash into buyouts, offering bespoke chips and expanding into a software business has established it as a strong rival, as the AI revolution shows few signs of abating. Nvidia is still the undisputed leader in the industry, but Broadcomâs bold AI play here was enough to light a fire under investors and analysts both, sowing the seeds of what could become an epic showdown in the market for AI chips.
(Photo by Kenny Eliason)
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