Broadcom (AVGO 2.09%) became the latest chipmaker to see its stock jump after announcing a partnership with ChatGPT owner OpenAI. This follows in the footsteps of Nvidia and Advanced Micro Devices, which also struck deals with the AI model company, although no equity is exchanging hands as with the prior deals.
As part of its deal, Nvidia will invest up to $100 billion in OpenAI, while OpenAI will get up to a 10% equity stake in AMD, as part of their partnership.
As for the Broadcom-OpenAI collaboration, the two companies will join forces to develop and deploy 10 gigawatts of custom AI accelerators that will also use Broadcom's networking and Ethernet technology. A 1-gigawatt data center translates to roughly $50 billion, with about $35 billion of that going toward chips based on Nvidia's chip prices.
Image source: Getty Images
Becoming a major AI chip player
While the two companies have been collaborating behind the scenes for more than a year, this formal partnership marks a major step forward. OpenAI plans to begin deploying its Broadcom-designed custom chips starting in the second half of next year, with the 10-gigawatt build-out to be completed by 2029.
OpenAI is being extremely aggressive with its build-out plans. Between Nvidia (10 gigawatts), AMD (6 gigawatts), Oracle (4.5 gigawatts), and now Broadcom (10 gigawatts), it has committed to over 30 gigawatts of power capacity in a little over a month, which is more than 15 times the computing power it has today. OpenAI is clearly spreading out its bets and looking to diversify its chip supply chain, while creating some competition to lower costs.
That said, this is still a big win for Broadcom and sets it up well for the future. If it can design custom chips that help OpenAI reduce costs and improve performance, it will be in a very good position. With the AI market expected to eventually shift more toward inference, the custom ASICs (application-specific integrated circuit) that Broadcom helps customers design should become more important.
At the same time, this deal reinforces Broadcom's position as the go-to partner for companies building custom AI chips that don't want to completely rely on graphics processing units (GPUs). Broadcom already works with Alphabet, Meta Platforms, and TikTok owner ByteDance on their custom AI chip efforts, with it projecting that those three customers alone could be a $60 billion to $90 billion market opportunity by its fiscal 2027. Given that it is only set to deliver over $63 billion in revenue this fiscal year, ending Nov 2, that's a huge opportunity.
Another surprising twist in all this is that Broadcom said that OpenAI is not the mystery $10 billion customer it mentioned on its last earnings call. That's significant because investors had assumed it was. The fact that it's not suggests another large partner, possibly Apple, is behind that order, and it's been able to accelerate how quickly it can design these custom chips.
Is it too late to buy the stock?
Broadcom is set to enter a powerful new growth phase. It's been seeing strong growth both with its networking portfolio and custom AI chips; however, it's just scratched the surface so far. It's now designing custom AI chips for some of the biggest heavyweights in the AI and tech space, and most of that revenue hasn't even begun to flow its way.
Looking at valuation, the stock isn't cheap on a forward price-to-earnings (P/E) basis, as it trades at more than 38.5 times fiscal 2026 analyst estimates. However, it has a price/earnings-to-growth ratio (PEG) of under 0.8, with PEGs below 1 considered undervalued.
That's still an attractive valuation, especially considering that much of its growth is really set to accelerate in fiscal 2027 when these new custom chips start being deployed. The OpenAI deal alone could be worth upward of $100 billion a year.
As such, I don't think it's too late to buy Broadcom stock, because it should be one of the best growth stories in tech over the next few years.
