To The Moon

Broadcom Soars After Announcing Split: What's Next for Growth?

$Broadcom(AVGO.US)$ is taking a page from $NVIDIA Corp(NVDA)$  's playbook, announcing a stock split after a period of strong quarterly performance and a significant rise in its stock value. The chipmaker has revealed plans for a 10-for-1 forward stock split, scheduled to take effect post-market close on July 12, with shares trading on a split-adjusted basis from market open on July 15.

Shares of Broadcom, which have risen over 100% in the past year, ended Wednesday with a 2.4% increase at a price of $1,495.51. The momentum continued into after-hours trading, where the stock saw a significant boost, culminating in a more than 12% rise by the close of Thursday.

The fiscal second-quarter report for 2024 showcased a significant revenue increase to $12.49 billion, up from $8.73 billion in the previous year, and exceeding the FactSet consensus of $12.06 billion. Net income for the quarter was reported at $2.12 billion, or $4.42 per share, a decrease from the $3.48 billion, or $8.15 per share, recorded in the same quarter last year. Adjusted earnings reached $10.96 per share, topping analyst expectations of $10.85 per share.

CEO Hock Tan attributed the robust performance to the demand for AI and contributions from VMware.

What Are the Future Growth Drivers and Catalysts?

The Continuous Expansion of the AI Market

In the chip sector, Broadcom is capitalizing on the momentum in AI. Training large-scale AI models requires an array of processors such as GPUs, NPUs, LPUs, collectively referred to as XPUs. Renowned tech companies such as Nvidia and $Advanced Micro Devices(AMD.US)$ provide these components, in addition to ASIC(Application-Specific Integrated Circuit) chips from enterprises like Broadcom and $Marvell Technology(MRVL.US)$. At the same time, Broadcom's networking products are set to benefit from a substantial investment in robust generative AI technology.

After the release of the latest quarterly report, Broadcom has raised its guidance for AI revenue for the full year, with the new forecast anticipating $10 billion, an increase from the previous estimate of $11 billion. Barclays analysts have characterized this updated estimate as "conservative and more of a base case scenario." They further emphasize their perspective by stating, "In our view, [Broadcom] remains one of the best ways to play AI."

• Rapid Growth in the ASIC Chip Market

The ASIC chip market is experiencing rapid growth, with these custom integrated circuit chips becoming increasingly favored for tasks requiring high performance, low power consumption, cost-effectiveness, confidentiality, security, and reduced circuit board size. ASICs hold a competitive edge over standard compute cards, offering tailored solutions that align more closely with the specific use cases of customers.

According to $Morgan Stanley(MS.US)$, by 2027, ASICs are projected to represent 30% of the overall AI chip market, which the investment bank estimates will be valued at $182 billion then. This projection implies that AI-focused ASICs could account for nearly $55 billion annuallyin 2027, highlighting the substantial market opportunity for these specialized chips.

As the complexity of chip designs and systems grows, major technology companies are forging stronger partnerships with ASIC providers. Tech giants like $Alphabet(GOOG)$  , $Meta Platforms, Inc.(META)$  , $Microsoft(MSFT)$  , and $Amazon.com(AMZN)$  , among other cloud and hyperscale companies, are at the forefront of this trend. Notable examples include Google's TPU, Meta's MTIA, Microsoft's Maia, and Amazon's Trainium2. Meanwhile, these hyperscalers are ramping up their capital expenditures. Bank of America forecasts that tech behemoths Microsoft, Amazon, Google, and Meta Platforms will collectively allocate $180 billion in capital expenses in 2024. This represents a substantial 27% uptick from the preceding year's investment.

Broadcom currently leads the custom (ASIC) chip design market with a commanding 55-60% market share, according to JPMorgan. This dominance is underscored by their service to three hyperscale customers: Google, Meta, and ByteDance. Tan said on the earnings call.

• Leadership in Networking Chip Market

Beyond ASIC chips, Broadcom boasts a profound accumulation and advantage in the domain of networking chips, particularly Ethernet switch chips. In this arena, Broadcom secures the leading position, commanding approximately 70% of the global market share.

Thanks to growing AI workloads, the Ethernet switch market is maintaining steady expansion. The global Ethernet Switch Chips market size was valued at US$ 3088.9 million in 2023. It is anticipated to reach US$ 3721.5 million by the year 2029, according to the latest study by Kingpin Market Research.

Additionally, Gartner, the analyst firm, believes that three forthcoming enhancements to the Ethernet standard will render it a more suitable platform for hosting AI workloads, positioning the technology as a viable contender to Nvidia's InfiniBand solutions. Anushree Verma, a director analyst from Gartner's Emerging Technologies and Trends group, anticipates that Ethernet adoption will hit 25% among providers by 2026. This uptake is expected to surge, leading to over eighty percent of providers offering it within a decade. Accompanying this transition by technology providers, Gartner projects that by 2028, 45 percent of Generation AI workloads will be running on Ethernet, a significant increase from less than 20 percent currently.

The Potential Synergies in Infrastructure Software Business

Except for its custom chip design and networking semiconductors crucial for building AI systems, Broadcom is also expanding its horizons into the software realm. This includes offering products for mainframe computers, cybersecurity, and data center optimization. The acquisition of VMware, which was finalized in November, stands as a significant move in Broadcom's software expansion strategy.

The assimilation of VMware into Broadcom's operations isone of key factors supporting Morgan Stanley's optimistic outlook. Analysts at Morgan Stanley postulate that the integration will enable Broadcom to streamline operations, thereby reducing costs and generating steady cash flows.

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