Big tech is planning a massive spending spree in 2025. Four of the largest tech companies in the world are targeting a combined $320 billion in capital expenditures (capex) this year, and most of that spending will go toward building and refreshing artificial intelligence (AI) data centers for training and using generative AI.
Nvidia (NVDA +1.68%) is sure to be a big winner from all of that spending. Practically all of the big tech companies reiterated the importance of their relationships with the leading designer of graphics processing units (GPUs). But comments from the management of Meta Platforms and Google parent Alphabet suggested a bright future for another chipmaker.
Broadcom (AVGO +2.02%) could end up being a big winner from the increase in spending by big tech in 2025 and beyond. Here's what Meta and Google said, and what it means for Broadcom investors.
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The rise of custom chips
Broadcom makes a lot of different types of semiconductors. When it comes to AI data centers, it plays an essential role. It makes chips for network switches, the devices that make sure data moves quickly and efficiently among servers. In effect, Broadcom's chips make sure Nvidia's chips are working as effectively as possible in Meta's and Google's data centers.
But Broadcom also makes some other chips that Meta and Google deploy in their data centers. Its technology is behind Meta's custom AI chip, the Meta Training and Inference Accelerator (MTIA).
Google, meanwhile, has been working with Broadcom since 2015 to develop its Tensor Processing Unit (TPU). Both Meta and Google had good things to say about their custom chips during their fourth-quarter earnings calls.
During Meta's call, chief financial officer Susan Li told analysts: "In 2024, we started deploying MTIA to our ranking and recommendation influence workloads for ads and organic content. We expect to further ramp adoption of MTIA for these use cases throughout 2025."
Over the long run, Meta sees its chips taking over more and more of its AI data centers from Nvidia and general GPUs. "Next year, we're hoping to expand MTIA to support some of our core AI training workloads, and over time, some of our GenAI use cases," Li said later in the call.
NASDAQ: META
Key Data Points
Alphabet CEO Sundar Pichai said that in the fourth quarter, "We saw strong uptake of Trillium, our sixth-generation TPU." The company only launched its newest TPUs to the general public in December, giving developers less than three weeks to ramp up use before the end of the quarter. So, the comments suggest 2025 could be a big year for TPUs.
Custom AI accelerator chips are more efficient than general-purpose GPUs for many types of AI workloads. As big tech scales up its data centers, eking out small efficiencies can have a big impact on the bottom line. As a result, expanding the uses for custom chips and having full control over the technology stack become increasingly important as capex budgets grow.
Broadcom expects even stronger results long term
Alphabet and Meta aren't the only companies partnering with Broadcom to build custom AI accelerators. TikTok parent company ByteDance is one of its three largest customers. And during the fourth-quarter earnings call, Broadcom management announced two new customers building their own next-generation chips with its help. Many believe those are Apple and OpenAI.
Apple is notably a fan of Broadcom's chips. It used Google's previous-generation TPUs to train its Apple Intelligence system last year. A push by Apple to take more control of its AI training and development could quickly turn it into one of Broadcom's biggest customers.
The company expects the market for custom AI accelerators to grow to between $60 billion and $90 billion within three years. Last year, Broadcom accounted for roughly 70% of custom AI accelerators and generated about $12 billion in sales.
For reference, its total sales across its diversified operations for 2024 were just $51.6 billion, so the growth in AI chips alone could nearly double its revenue if it maintains its share of the market.
NASDAQ: AVGO
Key Data Points
But even with a bright future, valuation still matters. Broadcom's stock trades for 37 times forward earnings as of this writing. And while the chipmaker is poised to see very strong earnings growth over the next few years, it's hard to justify paying such a premium for the stock.
If the stock price came down to a value closer to 30 times 2025 earnings, it may be worth buying considering analysts expect more than 30% earnings growth this year, giving it a price/earnings-to-growth ratio of around 1. Or if adoption of Broadcom's custom chips proves even stronger than expected at this point as Meta and Google look to expand their use in their data centers, it could end up growing into that valuation.
Broadcom is certainly a company and a stock to keep an eye on for investors interested in the future of artificial intelligence. But right now, it's too expensive to recommend buying.
