Did This AI Chip Giant Just Score a Major Victory Over Nvidia?

As artificial intelligence (AI) continues to reshape the tech landscape, Nvidia (NVDA) has long held the spotlight, with its GPUs powering the most sophisticated AI models. But Broadcom Inc. (AVGO), historically known for its dominance in networking and connectivity solutions, is increasingly flexing its muscles in the AI market to challenge Nvidia’s long-held leadership.

With massive investments and advancements in AI-driven chips, Broadcom is making waves among tech giants by delivering the high-speed, efficient hardware needed for modern AI infrastructure. What’s more, as AI demand skyrockets, Broadcom’s partnerships with tech leaders, many of whom are already integrating Broadcom’s custom silicon into their products, underscore its growing reputation as a key enabler of AI advancements.

In fact, Broadcom’s momentum just got a massive boost from reports of a new partnership with OpenAI, the trailblazing AI startup backed by tech titan Microsoft (MSFT). Rather than building its own chip production facilities, the ChatGPT maker has chosen Broadcom and Taiwan Semiconductor Manufacturing Company(TSM) to develop custom, in-house chips tailored specifically for AI inference needs.

While Nvidia's GPUs continue to be the cornerstone of AI infrastructure, Broadcom’s rising dominance in the AI arena, coupled with this recent partnership with OpenAI, signals that it’s more than ready to compete in the high-stakes race for AI supremacy. Here’s a closer look at the chip stock.

About Broadcom Stock

Headquartered in Palo Alto, Broadcom Inc. (AVGO) is a global tech powerhouse with a diverse portfolio spanning semiconductors, enterprise software, and security solutions. From cloud and data centers to wireless, broadband, and cybersecurity, Broadcom delivers cutting-edge technology across essential markets. Its industry-leading products power everything from mobile connectivity and mainframe systems to private and hybrid cloud infrastructures, cementing Broadcom’s status as a key force in the digital world.

With a market cap of around $787.2 billion, Broadcom's shares have been on an impressive upward trajectory, capturing the spotlight as it consistently outperforms the market. Over the past year, its shares have skyrocketed about 92%, eclipsing the broader S&P 500 Index’s ($SPX) very respectable 31.1% annual return. 

Plus, in 2024 alone, AVGO stock is up roughly 51%, easily outshining the SPX’s 19.8% gain on a YTD basis.

At first glance, Broadcom may seem pricey, trading at 34.71 times forward adjusted earnings and 15.24 times sales. However, these figures represent a discount compared to industry leader Nvidia, which commands a premium at 47.83 times forward earnings and a lofty 26.56 times sales. But what sets Broadcom apart is not just its valuation.

With 13 consecutive years of dividend increases and a solid 46% payout ratio, the company is also highly committed to rewarding investors. On Sept. 30, Broadcom paid its shareholders a quarterly dividend of $0.53 per share. Its annualized dividend of $2.12 per share offers a yield of 1.25%, making AVGO an attractive choice for investors seeking reliable passive income.

Broadcom Crashes After Q3 Earnings

Broadcom showcased remarkable strength in its Q3 earnings report, surpassing Wall Street’s expectations on both the top and bottom lines. But despite the stellar performance, Broadcom’s shares took a hit after the release, collapsing over 10% on Sept. 6.

This decline was primarily due to the company's conservative guidance for Q4. Management is projecting revenue around $14 billion, slightly falling short of analysts’ expectations of $14.04 billion, which spooked investors and overshadowed the otherwise strong quarterly performance.

In Q3, net revenue soared to $13.1 billion, marking a robust 47.3% increase year over year. The company also reported adjusted EPS of $1.24, up 19.1% annually, beating analysts’ forecasts.

The semiconductor solutions segment emerged as a key driver, raking in a staggering $7.3 billion in revenue and contributing over 50% to the company's top line. This growth underscores Broadcom's pivotal role in powering critical technologies across diverse sectors. The infrastructure software segment exploded with a remarkable 200% growth to $5.8 billion, a significant leap from just $1.9 billion last year.

Free cash flow, excluding restructuring and integration costs, climbed 14% year-over-year to $5.3 billion. At the end of Q3, cash and cash equivalents increased to $9.95 billion, up slightly from the previous quarter’s $9.81 billion.

CEO Hock Tan commented on the impressive results, noting the ongoing strength in Broadcom's AI semiconductor solutions and VMware, with projected AI revenue expected to hit $12 billion for fiscal year 2024, driven by demand for Ethernet networking and custom accelerators for AI data centers.

Is Broadcom’s Bold Partnership With OpenAI a Threat For Nvidia?

While OpenAI has reportedly been in discussions with Broadcom since at least July to develop an AI server chip, on Oct. 29, Broadcom's shares closed up more than 4% after headlines broke about its strategic alliance with the startup. In a significant shift, Microsoft-backed OpenAI is said to have abandoned its plans to establish a global network of foundries, choosing instead to partner with Broadcom and Taiwan Semiconductor to develop custom in-house chips tailored for AI applications.

This strategic move aims to address AI inference needs and marks a pivotal moment in OpenAI’s quest for technological independence. With Broadcom's support, the two companies plan to start chip production by 2026, positioning Broadcom as a key player in the AI landscape. While OpenAI continues to leverage the power of Nvidia and Advanced Micro Devices (AMD) for its current AI initiatives, the increasing demand for Nvidia's GPUs has sparked its search for alternatives.

This could represent a growing trend among tech giants looking to enhance efficiency and reduce cost alongside dependency on costly suppliers like Nvidia. OpenAI's collaboration with Broadcom could signal a formidable challenge to Nvidia’s dominance in the AI chip market, raising the stakes in the battle for supremacy in the rapidly evolving tech landscape.

What Do Analysts Expect For Broadcom Stock?

Overall, the mood on Wall Street is highly bullish for AVGO stock, which has a consensus rating of “Strong Buy.” Of the 33 analysts in coverage, 30 advise a “Strong Buy,” and the remaining three maintain a “Hold.”

The mean price target for AVGO is $194.07, indicating an upside potential of around 12.6% from current levels, while the Street-high target price of $240 implies that the stock could rally as much as 39% from here.

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On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.