Broadcom: Could Benefit from Further Advances in AI
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Software companies have woken up
U.S. indices hit new highs, maintaining their upward trends. Software companies are now beginning to catch up with the semiconductor sector, which has been leading the way so far, so we took a closer look at Palantir and Microsoft among the results.
International Markets - Technical Analysis
Minor corrections were quickly broken to the upside by U.S. indices. As a result, the upward trends remain intact. A more sustained trend reversal would require a clear break in the upward trends and possibly the formation of reversal patterns, but there is no sign of this yet. European stock markets also joined the positive wave, but were unable to reach historic highs. For their uptrends to break, reversal patterns would need to form here as well. The correction in the emerging markets index did not last long either; due to the new swing high, the uptrend remains intact, with a change expected later.
Within the AI megatrend, the focus is increasingly shifting from training to usage and inference, which could bring new winners to the forefront in the semiconductor industry. In this phase, the role of custom-designed, task-specific, and energy-efficient AI chips is becoming more important, an area where Broadcom holds a market-leading position. The company’s strong relationships with hyperscale customers, long-term custom AI chip agreements, and secured manufacturing capacity create excellent growth visibility. At the same time, the stable, high-margin IT infrastructure business mitigates risks stemming from cyclicality. Together, these factors result in an attractive risk-return profile. Taking all this into account, we are adding Broadcom shares to our Equity Top Pick list.
Company Overview
Broadcom is a market leader in custom-designed AI chips (ASICs). The company focuses exclusively on chip design and outsources manufacturing to TSMC. In addition, the company has an IT infrastructure services segment that provides virtualization, cloud-based, and cybersecurity solutions to enterprise customers. The semiconductor segment currently accounts for about two-thirds of revenue and serves as the primary growth driver. In contrast, the IT infrastructure business generates approximately one-third of revenue, supporting the company’s operations with stable and predictable cash flow.
Revenue in the semiconductor segment is highly concentrated, coming primarily from six major hyperscale customers, including Meta, OpenAI, Anthropic, and Google. Among these, Google plays a key role, as the TPUs (Tensor Processing Units) developed jointly with Broadcom represent the company’s most important source of revenue. TPUs have played a key role in the growth of Google’s AI ecosystem, contributing to the Gemini model’s market-leading position (in terms of performance) and strengthening the competitiveness of Google Cloud services. The company also offers AI-focused networking solutions, which also hold significant growth potential in the coming years.
Sales in the IT infrastructure business operate on a subscription-based model, providing bundled offerings to large enterprise customers. The segment generates stable, highly predictable revenue, which mitigates the risks associated with the cyclical nature of semiconductor revenue. The company focuses on a premium customer base in this area, which, combined with cost efficiency, enables outstanding margins (gross margin of 93%), though growth remains in the low single digits.
Investment case
The wave of AI infrastructure development could provide Broadcom with a favorable structural tailwind. Within the AI megatrend, as the focus gradually shifts from training to inference phase in the coming years, it will gain importance, and the winners could be custom-designed AI chips (ASICs), as they can be optimized for specific tasks and are energy-efficient. Broadcom is the market leader in this segment.
The TPUs co-designed with Google are competitive with Nvidia GPUs during the inference phase, while they currently outperform GPUs in terms of energy efficiency; thus, in a scenario where energy becomes the bottleneck in AI, the company’s solution could gain greater value. Furthermore, an Nvidia GPU costs nearly ~3x as much as a TPU, so if hyperscalers find themselves in a tight cash flow situation, the TPU could be a favorable alternative, as it is not only cheaper to purchase but also to operate, given that it offers ~2x the performance-per-watt ratio of Nvidia’s previous-generation product.
In the short term, another catalyst could be the 2026 capital expenditure plans announced by hyperscalers during Q1—particularly in the case of Google (+50% vs expectations) and Meta (+15% vs expectations), which are among the six major customers to whom Broadcom supplies custom-designed AI chips. In the past six months, semiconductor companies without their own production lines have massively underperformed their competitors with manufacturing capacity; however, Broadcom announced in early March that it had secured its supply chain for the 2026–2028 period regarding both memory and TSMC’s high-end manufacturing capacity. Furthermore, in recent weeks, it has signed long-term agreements with Anthropic, Meta, and Google for ASIC deliveries, reporting an agreement with the latter extending through 2031, which could help provide longer-term revenue visibility for the company and mitigate risks related to the sustainability of its growth rate.
Taking all of this into account, we are adding Broadcom shares to our Equity Top Pick list.
Valuation and Debt Level
The company’s profit margin exceeds 50%, while its EBITDA margin approaches 70%; only Nvidia in the industry boasts comparable figures. Furthermore, it is one of the top semiconductor companies in terms of growth; analysts expect annual average revenue growth of around 45% and EPS growth of over 60% for the 2026–2028 period. Despite this, the stock is not trading at a premium compared to either its competitors or its own valuation multiples seen over the past 2–3 years. Based on key metrics, even a price level of $480 appears fair. The company’s debt position is not significant, with a net debt/EBITDA ratio of just 1.1, which, combined with strong cash flow generation, can be considered a healthy level.
Key risks
One key risk associated with Broadcom is potential margin compression resulting from the increasing proportion of AI-related semiconductor product sales in the revenue mix. This has a downward effect on the company’s overall gross margin, given that the IT infrastructure business operates with an exceptionally high gross margin of approximately 93%, compared to the roughly 60% level of AI-focused semiconductor products. Although the market has already priced this in, there may be more positive surprises here than in the early March flash report, which suggests no short-term pressure on margins.
In addition, the proportion of sales in China is relatively high (though declining year over year) at ~17%, which could pose a geopolitical risk. Furthermore, there is a high concentration of customers in the semiconductor business: nearly all revenue comes from six major players, with Google standing out among them (TPU shipments). In addition, any potential increase in risks surrounding the financing of AI infrastructure investments could naturally have a negative impact on the company, as well as on the entire industry.
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