Spending on artificial intelligence (AI) infrastructure is booming, but there is also a shift in the market. While Nvidia's graphics processing units (GPUs) continue to dominate the market, more and more large companies are turning toward developing AI ASICs (application-specific integrated circuits) to handle some of these workloads. ASICs are custom chips that have been preprogrammed for specific tasks, and because of that, they tend to have strong performance and are more energy efficient.
Meanwhile, the company that hyperscalers (owners of large data centers) are increasingly turning to to help them make custom AI chips is Broadcom (AVGO 1.14%). Broadcom is a leader in ASIC technology, where it can help turn customers' designs into physical chips and get them manufactured at scale. It basically provides the building blocks and some of the important intellectual property (IP) for these chips to work.
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Broadcom made its mark in the space by helping Alphabet create its well-regarded tensor processing units (TPUs). It continues to benefit from the success of TPUs, and it will deliver $21 billion worth of TPUs to Anthropic later this year, as Alphabet is now letting customers deploy its chips through its cloud computing unit, Google Cloud.
Alphabet's TPU success has also led other hyperscalers to flock to its ASIC services. The company has said that its three earliest customers -- believed to be Alphabet, Meta Platforms, and TikTok owner ByteDance -- are a $60 billion to $90 billion market opportunity in fiscal 2027 (ending October).
Meanwhile, it has also added OpenAI as a customer, signing a deal to supply it with custom AI accelerators that can support data centers capable of generating 10 gigawatts of computing power. Based on the pricing of Nvidia GPUs, that would value the deal at around $350 billion. Broadcom is also reportedly working with Apple to develop custom AI chips for the iPhone maker, as well.
NASDAQ: AVGO
Key Data Points
Citigroup analysts estimate that Broadcom's AI revenue could surge from around $20 billion last fiscal year to over $50 billion this fiscal year. It then sees it doubling again to $100 billion in fiscal 2027. Given that Broadcom produced just $63.9 billion in total revenue in the just-completed fiscal 2025, that's an enormous growth opportunity for the company. Broadcom's VMware virtualization business should also continue to see solid growth, while the company's non-AI semiconductor business is already at trough levels, with the potential for a rebound in the coming years.
With AI spending growth set to explode over the coming years and companies looking for an alternative to Nvidia's GPUs to reduce cost, Broadcom's stock stands to be one of the biggest winners.
