After a steep month-long slide, Broadcom (NASDAQ: AVGO) just turned its fortunes around in a huge way.
Shares of the chip giant reached an all-time high closing price of nearly $369 on Sept. 9. This came as markets reacted to CEO Hock Tan’s AI-incentivized pay package. But the gains were short-lived, with the stock dropping around 12% by market close on Oct. 10. MarketBeat noted at the time that the 10% single-day gain Tan’s package resulted in felt unwarranted. Thus, it wasn’t overly surprising to see shares correct.
However, everything changed on Oct. 13, when Broadcom announced its latest AI chip customer: OpenAI. This deal sent shares up 10% in one day as markets reacted to the billions in new sales Broadcom should generate from the deal. Here’s why the OpenAI deal is a game-changer—and what it means for AVGO going forward.
Broadcom Matches NVIDIA in AI Power, Surpasses AMD
In the announcement, Broadcom said that OpenAI will deploy ten gigawatts (GW) of its custom AI accelerators, also known as XPUs. For reference, that’s equal to around one-third of the energy needed to power the state of New York during peak summer demand. That’s a lot of chips.
Broadcom’s deal is notably equal in size to the 10 GW deal OpenAI signed with NVIDIA (NASDAQ: NVDA). It is also much larger than the 6 GW deployment that OpenAI has agreed to with Advanced Micro Devices (NASDAQ: AMD). This clearly shows that although AMD is gaining traction, Broadcom and NVIDIA are still in a league of their own when it comes to AI chips.
Broadcom will make not only custom AI XPUs for OpenAI but networking chips as well. While XPUs perform the hard calculations that make AI workloads go, networking chips allow different XPUs to communicate. Thus, Broadcom’s deal with OpenAI includes a large bundle of products, making it much more significant than an XPU deal alone.
XPUs typically make up 70% of Broadcom's AI semiconductor revenues, while networking chips make up the other 30%. Networking’s share of this total has notably reached as high as 40% in recent quarters. Each is a very significant part of the company's AI business, underscoring how substantial the inclusion of both technologies in the deal is.
Furthermore, this provides evidence that Broadcom’s Ethernet-based networking technology is competitive with NVIDIA’s networking offerings. Staying competitive on this front is particularly important now, given that NVIDIA’s OpenAI deal also included networking equipment. The networking battle between these two companies is somewhat overlooked but highly important. With this win, Broadcom continues to show it is a first-class name in AI.
Broadcom’s Q3 Announcement Looks Even Better Now
Another interesting wrinkle in this story is that analysts were wrong about Broadcom, but in a great way.
In its Q3 earnings call, Broadcom announced that it had gained another hyperscaler customer for its AI chips. After the company disclosed that this deal was worth around $10 billion, many believed the customer was OpenAI. When asked directly about this, the President of Broadcom’s Semiconductor Solutions Group, Charlie Kawwas, refuted the claim. He said that he had not received a $10 billion purchase order from his “good friend Greg," referring to OpenAI President Greg Brockman.
Thus, Broadcom has added not only one but two major customers over the last few months: OpenAI and someone else. This makes the company’s past statement that it gained a new hyperscaler customer even more impressive than before.
AVGO Continues Its Momentum, Updated Targets See 13%+ Upside
Clearly, Broadcom continues to be one of the key companies in the driver's seat when it comes to the AI infrastructure buildout.
These new deals provide further confidence that Broadcom appears well-positioned to convert the three other hyperscalers it’s reportedly in talks with.
Overall, the outlook for this stock continues to look highly promising in the long term.
Shares are now only down around 4% from their all-time highs, meaning that upside could be somewhat limited in the near term. Broadcom’s earnings release in December could be another upside catalyst for the stock.
The MarketBeat consensus price target on AVGO is $372, implying around 5% upside in shares.
However, every price target update tracked by MarketBeat after the OpenAI announcement sits at $400 or higher. This implies at least 13% upside in shares and indicates that shares could hit new highs.
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The article "Broadcom Inks OpenAI Deal: Why It's A Huge Win for AVGO Stock" first appeared on MarketBeat.
