This Is Not Broadcom’s ‘Nvidia Moment’ Yet

This article was originally published on Forbes on Updated Dec 19, 2024, 05:10pm ESTForbesForbes on Updated Dec 19, 2024, 05:10pm EST

Broadcom’s stock surged 35% in two days despite a mediocre Q4, as management offered investors a picturesque addressable market forecast for 2027. Q4 was not the blowout report the market made it out to be, as Broadcom fell just short of revenue estimates while guiding Q1 barely above consensus. Despite this, the market did solidify that momentum continues to build for AI stocks entering 2025.

Broadcom’s commentary on the call as to the serviceable addressable market for its two leading AI segments, custom silicon and networking, is why the stock moved a whopping 25%. As a reminder, a serviceable addressable market refers to market size the company can service, and is not a forecast of the company’s revenue. While Broadcom gave investors a reason to dream, it’s not the stock’s ‘Nvidia moment’ despite the surge in the stock price resembling Nvidia’s 2023 breakout. Instead, Broadcom is reporting flat QoQ AI revenue with the 200% year-over-year number being old news (Broadcom had guided for $12B in AI revenue in Q3 and only marginally beat that figure).

Among the AI titans, Broadcom is the one of the only stocks to see lumpy AI growth, reporting flat AI revenue growth from Q2 to Q3 – with expectations it remains at a mere 3% QoQ growth to start fiscal 2025. This occurred roughly a month before tariffs are likely to affect its top customer – Apple.

Below, I provide data that shows the move in Broadcom’s stock was premature, creating outsized pressure on Broadcom to live up to AI juggernaut Nvidia in 2025, which is unrealistic given Broadcom has only ~25% of revenue from AI versus 80% of revenue from Nvidia. When you factor in 30%+ of Broadcom’s revenue comes from China, versus Nvidia at 15% for China exposure, what you have is an upside down scenario for Broadcom where tariffs could negatively impact more revenue than what AI is currently providing.

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A Tantalizing Forecast for Broadcom’s AI Opportunity

The Street is desperate to find the next Nvidia in the vast and complex sector of semiconductors and hardware providers. There were many raises/beats across AI-related semiconductors, including from many small, lesser-known names. Meanwhile, Broadcom’s report was one of the least spectacular as there was a very rare miss for Q4 revenue and a Q1 guide that was only $30 million above consensus.

Growth is challenged sequentially, with Q1 only set to grow 4% QoQ. Semiconductor revenue was seen declining nearly -2% sequentially as well, with management guiding for $8.1 billion in Q1 versus $8.23 billion in Q4. AI revenue was not much of a surprise either, as Broadcom had guided for full-year AI revenue of $12 billion in Q3, coming in not even 2% above the guide.

To offset the lackluster performance, the management team painted a picture for AI revenue growth to scale quickly with a tantalizing addressable market forecast for 2027.

Here’s what CEO Hock Tan said that energized the stock:

“We currently have three hyper-scale customers who have developed their own multi-generational AI XPU roadmap to be deployed at varying rates over the next three years. In 2027, we believe each of them plans to deploy 1 million XPU clusters across a single fabric. We expect this to represent an AI revenue Serviceable Addressable Market, or SAM, for XPUs and networking in the range of $60 billion to $90 billion in fiscal 2027 alone.

We are very well positioned to achieve a leading market share in this opportunity and expect this will drive a strong ramp from our 2024 AI revenue base of $12.2 billion. Keep in mind though, this will not be a linear ramp.”

Tan also added that Broadcom was in advanced development with two additional hyperscalers, rumored to be ByteDance and OpenAI, with possibilities to turn both into revenue generating customers before 2027.

The comments the ramp will not be linear likely refers to the ramp being back-half weighted, with the majority of revenue being recognized between 2026-2027. On the call, it was mentioned that its 3nm custom silicon will ship in the second half of 2025. Meanwhile, Broadcom is trading at an astronomical valuation that is higher than Nvidia’s.

In fact, Broadcom is up against its toughest year yet as Nvidia’s Blackwell systems are set to raise the bar competitively with custom silicon as powerful Blackwell systems combining 36 CPUs and up to 72 GPUs ship in volume in Q1 with a bigger ramp in Q2 of 2025. The 72 GPUs in the NVL72 will be used as a single accelerator for 1.4 exaflops of AI compute power. Nvidia’s proprietary NVLink Switch will reach 130 TB/second, which is “more than the aggregate bandwidth of the internet.” Outside of narrow use cases, custom silicon will not be able to compete with Nvidia in 2025, whereas in future years, custom silicon may have more of an opportunity to catch up. For example, when comparing with Nvidia’s 2023-2024 Hopper generation, Amazon’s Trainium2 instances with 100,000 processors “equals around 32,768 Nvidia H100 processors,” according to Tom’s Hardware. This helps to paint a picture as to why custom silicon revenue for Broadcom is at a low $300 million per quarter in custom silicon revenue compared to Nvidia’s $27 billion per quarter on GPUs (removing the $3 billion Nvidia makes in networking from the data center segment).

Going back to the comment of a $75 billion serviceable market by 2027, at the midpoint - let’s put this opportunity in perspective. For 2024, Broadcom reported AI revenue of $12.2 billion, up 220% YoY from $3.8 billion in 2023. As stated, this was guided in Q3 and was not a beat/raise or news to anyone who covers the stock.

CEO Hock Tan said he believes Broadcom’s current serviceable AI market is worth $15 billion to $20 billion this year, suggesting that Broadcom commands approximately 70% market share at the midpoint of that range.

Broadcom serves two major markets in AI – custom accelerators which Broadcom is referring to as XPUs, and networking and switches, ripe with competition from Nvidia, Arista, Cisco, and others.

It will certainly not be a straightforward path for Broadcom to maintain what it sees as a 70% share of these addressable AI markets. Nvidia is arguably a strong contender in networking with InfiniBand and is moving into ethernet with Spectrum-X, while there are many other networking suppliers involved with Broadcom’s hyperscale customers. As pointed out by the CEO regarding the serviceable addressable market: “There's room for many players. All we are going to do is gain our fair share.”

Assuming Broadcom can reach 60% share at a $75B addressable market size, that correlates to approximately $45 billion in AI revenue in 2027, or nearly 3.7x growth over the next three years. In other words, that would require AI revenue growth of ~55% annually through 2027. While hyperscaler capex definitely supports such a ramp, this growth pales in comparison to the numbers Nvidia has been putting up. Meanwhile, Broadcom does not have the moat that Nvidia has, which I pointed out five years ago is the CUDA development platform.

Nvidia is currently on track for approximately $114 billion in data center revenue in fiscal 2025, up 140% YoY and up 661% from fiscal 2023. In fiscal 2027, Nvidia is expected to generate nearly $220 billion in data center revenue, or nearly 8x higher than Broadcom’s AI revenue estimate of $29 billion. This would be about 36% of revenue at the consensus estimate for $80 billion, which pales in comparison to the 80% range Nvidia has, and AI server makers, with one expected to see up to 40% of revenue from AI next year.

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Broadcom’s AI Revenue at a Glance

Broadcom capped off fiscal 2024 with nearly 150% YoY growth in AI revenue to $3.7 billion, with networking the primary contributor. QoQ growth was ~20% in Q4, rebounding from flat QoQ growth in Q3; however, Q1 is expected to see QoQ growth decelerate to the low single-digits.

Here’s what Broadcom’s quarterly AI revenue growth has looked like:

Broadcom's quarterly AI revenue reached $3.7 billion in Q4, after remaining flat QoQ at $3.1 billion in Q3. Source: I/O Fund

The non-linear, bumpy ramp the CEO referenced is quite visible – sequential growth was flat in Q3, and for Q1, management’s guide for $3.8 billion in AI revenue points to sequential growth of under 3%. Meanwhile, Nvidia has grown data center revenue by $4 billion sequentially for four consecutive quarters – Nvidia’s sequential growth alone more than outpaces Broadcom’s total quarterly AI revenue.

For Q4, management said that they saw growth from both AI accelerators and networking, though not at the same rate. Networking component shipments were much higher in the back half of the year, with this strength continuing into the first half of next year. Management provided some additional growth figures for AI networking, with revenue up 158% YoY, driven by 4x growth in AI connectivity revenue from Tomahawk and Jericho shipments. AI networking contributed 76% of networking revenue, implying AI networking revenue of ~$3.4 billion, and custom accelerator revenue of ~$300 million in Q4.

While custom accelerator accounted for just a small portion of AI revenue in the quarter, management foresees strong growth in the second half of 2025. Broadcom is set to begin and quickly ramp shipments of its next-gen 3 nanometer AI ASICs to hyperscaler customers in the second half of the year.

Emphasis on Networking

Broadcom had previously laid out a path to 1 million accelerator clusters deployed by 2027, and re-emphasized that path in Q4’s earnings call. That’s essentially tenfold growth from the current 100K cluster sizes being deployed today. While that no doubt this will correlate into tremendous growth in accelerator shipments for Broadcom, Nvidia, AMD, and lesser-known ASICs design companies, Broadcom put emphasis on the need for networking to scale up to this degree.

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Piper Sandler analyst Harlan Sur asked management about the dollar content for networking vs custom accelerators, and what the attach rate of networking per accelerator would be (ie. $1 networking for $1 in accelerators). CEO Hock Tan explained that “the simple ratio to look at is there is scale up and there is scale out. And as we expand into a single fabric cluster of XPUs or GPU that grows bigger and bigger, guess what is more important. Scale up becomes more and more important. And the ratio we are talking about as we move up increases almost exponentially, which is why I'm saying from networking, as a percent of AI content in silicon today of between 5% to 10%, you're going up to 15% to 20% by the time you hit 500,000 to 1 million XPU GPU clusters.”

This is because of the increasing demands for networking and switches to connect exponentially larger clusters, from spine to leaf in the front end and back end, rack to rack and accelerator to accelerator. With that said, Nvidia and Broadcom are neck-and-neck in networking revenue with Nvidia at $3.13 billion for Q3 and Broadcom at $3.42 billion. This year, Nvidia will be increasing its networking content and ramping Spectrum X, it’s Ethernet networking platform.

This is Not Yet Broadcom’s Nvidia Moment

The opportunity beckons with AI cluster sizes set to grow tenfold or more over the next three years as hyperscalers build and deploy ever-larger data centers, however, this is decidedly not Broadcom’s ‘Nvidia moment’ yet. What separates the two is actual, numerical data.

Nvidia’s Hopper-driven breakout towards the $1 trillion market cap milestone in May 2023 came on the back of a ‘jaw dropping’ guide higher — it reported revenue of $7.2 billion for fiscal Q1 2024 (versus $6.5 billion estimated). The company guided for $11 billion in Q2 while analysts were expecting just $7.2 billion. Nvidia ultimately beat that guide as it reported $13.5 billion in revenue in Q2.

Since then, in just six quarters, Nvidia’s quarterly revenue has grown 5x from $7.2 billion to $35.1 billion, with $1 billion-plus beats each quarter along the way.

Nvidia's quarterly revenue has risen more than 5x since fiscal Q1 2024 with $1 billion-plus beats in the last six quarters. Source: Seeking Alpha

Broadcom, on the other hand, slightly missed revenue estimates this quarter and guided Q1 only marginally above consensus. AI revenue of $12.2 billion also came in just $0.2 billion above management’s forecast for $12 billion given in Q3; not exactly the out-of-the-ballpark blowout that Nvidia consistently put up quarter after quarter.

The difference between the two is quite clear:

Nvidia's sequential data center growth has totaled more than Broadcom's quarterly AI revenue in each of the last four quarters. Source: I/O Fund

Broadcom has the potential to capture a large part of a rapidly growing market in AI networking and custom silicon for hyperscalers, and cement itself as the #2 in AI semiconductor stock ahead of AMD, but it requires some speculation.

Broadcom has to prove that this market opportunity is theirs for the taking, and they will have to take it in full force and lay down the foundation for AI revenue to grow into that SAM – that is, to grow nearly 4x to $45 billion in AI revenue over the next three years (60% share of a $75B SAM).

Broadcom’s cloud software is executing well with VMWare’s integration almost fully complete, and cost synergies and operating efficiencies being realized, but AI hardware and networking is where Broadcom needs to prove it can sustain its large market size in an environment growing fiercely competitive.

For example, Arista is targeting AI networking revenue of $1.5 billion and another competitor is forecasting $2.5 billion for AI networking and custom silicon in 2025, while Nvidia’s networking revenue is well above a $12 billion annual run rate with Spectrum-X ramping. Regarding Spectrum-X, investors should take note that AI juggernaut Nvidia is entering the Ethernet market for the first time, following the success of InfiniBand. Thus, Broadcom’s lofty 70% market share is likely to come under serious pressure as Nvidia expects Spectrum-X to become a multi-billion dollar product within the next year.

This boils down to valuation – Broadcom’s surge to $250, up 40% in one week, has pushed the chipmaker to trade at its first ever premium to Nvidia since its merger with Avago in 2016, and a rather large premium at that. Both of the two have strong bottom lines, but Broadcom is now trading at 35.3x NTM earnings of $6.35, whereas Nvidia is trading at 33.1x NTM earnings of $3.95. Broadcom is also trading at a slight premium on the topline, at 18.3x NTM revenue, versus 17.9x for Nvidia. Broadcom is strong on margins, though not nearly as strong as Nvidia – the operating margin of 31.9% in Q4 was slightly over half of Nvidia’s 62.3%, with a net margin of 29.8% versus Nvidia’s 55.0%.

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Potential Entry for Broadcom

Despite the lower custom silicon revenue that needs to ramp and the highly competitive networking market, a lesser-known AI angle for Broadcom is the VMWare acquisition is paying off in spades... infrastructure software was up 196% with the acquisition now largely complete, and operating margins are an impressive 72% in this segment. Infrastructure growth was guided at 41% YoY for Q1, contributing nearly 45% of revenue, providing more robust margin tailwinds to complement AI semiconductor growth over the next couple of years. The synergies from AI-driven high-growth, high-margin infrastructure software and expectations for a rapid ramp in AI semiconductor revenue through 2027 could make Broadcom a compelling AI name, provided the price is right.

Broadcom (AVGO) broke out to new highs on heavy buying volume based on the results from their recent earnings report. A vertical move on heavy volume is everyone realizing at the same time the direction of the trend – shorts cover, and longs buy, causing the type of vertical price action exhibited below. These moves tend to be the 3rd waves in a 5 wave uptrend, which is what I believe AVGO just completed.

There are currently two scenarios based on the price action that the I/O Fund is tracking:

• Blue – AVGO completed wave 3 and is now in a deep wave 4 correction. The larger pattern has AVGO in an ending diagonal, which is a 5 wave pattern with deep retraces. If price goes below $212.50, the odds will favor this scenario, looking for a low between $198 - $169. This should give way to the final 5th wave swing to new highs.
• Green – AVGO would be in a standard 5 wave pattern and only in wave 4 of 3. This means that it should find a low above $212.50, followed by at least 2 more swings to new highs. This is the most bullish interpretation of the price action, and should see a continued uptrend into 2025.

Broadcom (AVGO) broke out to new highs on heavy buying volume based on the results from their resent earnings report. Source: I/O Fund

There was significant institutional activity in the $250, $240, and $224 regions. As price is notable below these regions, it implies that institutions sold at the recent highs. If these levels contain any bounce, it will further confirm that the 3rd wave is over, which support the Blue count. If $212.50 does break, confirming this scenario, as long as the 4th wave drop holds $157, the I/O Fund would see this drop as a buying opportunity.

Conclusion

Broadcom’s premium valuation coupled with a fraction of Nvidia’s AI revenue —- not to mention flat QoQ AI revenue growth for nearly three quarters —- is why this is not yet Broadcom’s Nvidia moment. Broadcom must now prove to the market that it can deliver on its promise and maintain its premium to the undisputed AI leader heading into 2025 with Blackwell’s fireworks show about to start.

Supply chain and demand signals point to 2025 being another strong year for Nvidia as Blackwell comes to market, with the I/O Fund tracking these data points to assess Nvidia’s growth potential in the year to come. The I/O Fund is also closely analyzing the supply chain to identify overlooked beneficiaries of the AI infrastructure buildout, sharing this information as well as buy and sell plans and real time trade alerts with premium members. The I/O Fund recently entered two separate beneficiaries for gains of 23% and 17% since November. Learn more here.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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