Broadcom (AVGO 0.50%) has been positioning its pieces on the board for a while, but the time for its secret weapon is about to come. While it has shown glimpses of what it could become, it's not much compared to where its management team believes it can be by the end of next year.
Broadcom's secret weapon is its custom artificial intelligence (AI) chip business, and it's about to hit full force as several clients' custom chips start to ship. This will transform Broadcom's business and lead to impressive returns along the way.
Image source: The Motley Fool.
Broadcom's custom AI chip business could generate $100 billion in revenue alone by the end of 2027
Right now, GPUs are dominating the AI training and inference market. While these are capable computing units, they aren't optimized for the task.
By partnering with a company like Broadcom, AI hyperscalers can develop an AI chip that is specifically tailored to their workload, which improves the economics of an AI business. There will always be a place for GPUs in the AI realm, as non-standard training sets and other scenarios could pop up, making a flexible computing unit like a GPU necessary. However, custom AI chips offer several advantages.
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The primary example of a custom AI chip is the Tensor Processing Unit (TPU), a chip that was designed in collaboration with Alphabet. The TPU is one of the primary reasons Alphabet's generative AI models are much cheaper to deploy than other models, and its TPUs have become so popular that Alphabet is actually selling them to other companies, like Meta Platforms. Several AI hyperscalers are seeing the benefit in these chips and started to design the process a while back. Now, these companies are starting to near production, and that should result in Broadcom's revenue soaring.
Wall Street analysts project major revenue growth, with the average analyst guiding for 63% revenue growth in 2026 and 53% in 2027. Management believes that custom AI chips will be a $100 billion business for itself in 2027, and Wall Street's $160 billion total revenue projection for 2027 backs that up.
The launch of widespread custom AI chip usage will transform Broadcom's business and allow its stock to soar as a result. While there are already high expectations baked into the stock price (it trades for 37 times forward earnings), I think there is still plenty of upside ahead as the market may not be fully pricing in what could happen in 2027 and beyond.
