A recent report from technology news outlet The Information suggests that Alphabet's (GOOGL 2.30%)(GOOG 2.49%) lead business unit Google is a big customer of semiconductor giant Broadcom (AVGO 2.66%) -- and that Google has discussed parting ways with Broadcom. The same day the rumor mill started cranking, a Google spokesperson said its engagement with Broadcom was unchanged, and that Broadcom "has been an excellent partner."
True or not, the rumor mill has served a beneficial purpose. Broadcom has been queried about a large "computing offload customer" during its quarterly earnings calls and other investing events for some time, but management has been mum on specific details. While it was always assumed it was a tech titan, and likely Google, this internal source seemingly confirms it.
But what is Google actually working on with Broadcom? And what does it mean for Broadcom (and Alphabet) shareholders?
NASDAQ: AVGO
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What is compute offload anyway?
Broadcom provided a general overview of its custom silicon projects (called an ASIC, or application-specific integrated circuit) back in 2022 for its mysterious large cloud computing customer. Management divvied up ASIC revenue into two buckets: routing and switching, and compute offload.
Generally speaking, compute offload is handled in two steps within a data center. When a computing request is made, routers and switches decide which part of the data center will handle the work. Once that's decided, processors -- historically CPUs, or GPUs like those designed by Nvidia -- make the computations, which are then sent back to the end user through the internet or private network by those routers and switches again.
But now that reports have surfaced that Broadcom's big ASIC customer is Google, we can make a few more assumptions.
Google is one of the world's biggest data center and compute-intensive businesses, handling tremendous amounts of internet and cloud traffic around the clock. Back in 2016, Google revealed its custom processor for specific AI workloads, called the TPU (Tensor Processing Unit), that it had begun using in 2015. It's these TPUs that Broadcom is apparently helping engineer (but not manufacture -- that's likely handled by Taiwan Semiconductor Manufacturing), as well as routers and switches for Google's vast global data center fleet.
NASDAQ: GOOGL
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How much is Google worth to Broadcom?
When Broadcom talked up its ASIC business in the spring of 2022, it said it earned nearly $800 million in 2021 for routing and switching, and nearly $1.6 billion from compute offload. Those two segments had been growing at a 20% average annual clip. Assuming 20% growth has continued, and that Google is the only ASIC customer (it likely isn't), Google could be worth upwards of $3 billion in revenue for Broadcom in 2023, or nearly 10% of total annual sales.
Suffice to say Google means a great deal to Broadcom, although Google itself debunked it was going to be parting ways anytime soon. Other ASIC companies that would like a piece of this business include Marvell Technology Group, a smaller competitor to Broadcom that is also riding the AI wave with its own routing and switching chip.
Broadcom is a really tough competitor
Even before Google said its relationship with Broadcom in co-engineering custom chips was safe, I was skeptical. Earlier this year, very similar reports from news outlets contended that Apple was nearing the end of its relationship with Broadcom too, in this case for 5G wireless and Wi-Fi chips. Nothing was further from the truth. A few months later, Apple renewed its multibillion-dollar supply agreement with Broadcom for a couple more years.
The secret? Broadcom designs chips, has an extensive library of patents on them, and also handles some proprietary manufacturing in-house. It's a very sticky supplier of semiconductors, one that even deep-pocketed tech giants can't easily cut out of their supply chains.
As for Google (supposedly) trying to save a couple of billion dollars a year, it will be just fine. It can handily afford to keep paying Broadcom for its help in compute offload chips, all while growing its profitability from digital ads and Google Cloud.
Whether it's mobile computing with Apple or the latest and greatest in AI with Google, Broadcom plays an integral role in the technology sector. This remains a top chip stock for the long haul.
