Broadcom (AVGO +0.93%) is making some big moves to tie itself even closer to frontier artificial intelligence (AI) labs Anthropic and OpenAI before they make their initial public offerings (IPOs). The chipmaker, which designs custom AI accelerators in partnership with some of the world's biggest companies, could finance up to $92 billion in chip purchases for the two companies.
That number includes $42 billion of senior debt for Anthropic with guarantees from Broadcom and the residual value of its chips. There's also an $18 billion junior debt tranche planned for Anthropic without Broadcom's guarantees, but it will have to wait until Anthropic's financials are made public. Broadcom is also in talks to secure up to $50 billion in financing for OpenAI to buy its new custom XPUs.
The financing is similar to Nvidia's (NVDA +0.56%) $500 billion financing plan revealed earlier this year. Broadcom's fortunes are already tied to massive spending ramp-ups from both Anthropic and OpenAI; this move doubles down on the chipmaker's exposure to the frontier AI labs. Here's what it means for investors.
Image source: The Motley Fool.
Broadcom's biggest competitive advantage
Broadcom is the dominant force in XPUs -- custom AI accelerator chips that compete with more general-purpose graphics processing units (GPUs) for space in AI data centers. There's a lot of momentum behind XPUs, and some hyperscalers have begun multisourcing their chips, partnering with Broadcom competitors such as Marvell Technologies. Marvell expects to expand its share of the fast-growing XPU market over the next five years.
Broadcom's ability to secure financing for its largest customers gives it a significant competitive advantage that could enable it to maintain its dominance in the custom AI chip market or raise prices. That's especially true with regard to its deals with Anthropic and OpenAI, as those companies aren't yet profitable, but it could also be a benefit in its dealings with hyperscalers, some of which are facing higher costs of capital as they dip into negative free-cash-flow territory.
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Key Data Points
For now, it appears both Anthropic and OpenAI are likely loyal Broadcom customers.
OpenAI partnered with Broadcom to develop Jalapeño, its first-generation custom AI accelerator. It started shipping last quarter. The early results are promising, and OpenAI plans to iterate quickly. Broadcom CEO Hock Tan said OpenAI plans to deploy 1.3 gigawatts worth of XPUs next year and up to 5 gigawatts in 2028.
Anthropic is more interested in the Tensor Processing Units (TPUs) that Broadcom designs in partnership with Alphabet. The AI lab is set to deploy 1 gigawatt of the newest-generation TPUs this year, Tan said on Broadcom's third-quarter earnings call. Installations will ramp to 5 gigawatts next year and 10 gigawatts in 2028, he said. Overall, Anthropic is on track to become Broadcom's largest XPU customer next year.
Is financing Anthropic and OpenAI a smart move?
Broadcom is acting as a backstop for Anthropic or OpenAI in the case they default on their debt. Before the chipmaker could get tapped for any of those bills, however, creditors would look to liquidate the Broadcom chips those loans were used to purchase. So, the residual values of its XPUs are an important factor in the lending agreements.
Nvidia is currently facing a challenge from its financing partners over how to value its GPUs over time, and the pace at which they depreciate as assets. It's likely Broadcom will face an even tougher challenge when it comes to negotiating terms. GPUs are general-purpose parallel processors, suitable for a wide range of computationally heavy workloads. XPUs are designed for much narrower ranges of workloads. The upside is that XPUs can be manufactured and operated at a lower cost. The downside is a lack of versatility.
As such, the nature of XPUs means they hold much more value in the hands of the companies that designed them than anywhere else. That increases the level of risk built into Broadcom's financing plans, because it decreases the likely residual value of the chips should they need to be resold.
The question for you as an investor is how bullish you are about the premise that the frontier labs will ultimately produce strong returns on invested capital and generate substantial profits. Access to XPUs that provide superior price performance on many workloads and come with lower up-front capital requirements than GPUs could help push those returns on invested capital higher and allow them to reach profitability sooner. If that's how matters are going to play out, then helping Anthropic and OpenAI finance their XPU purchases is a smart way for Broadcom to protect its biggest customers.
While the chipmaker's backing of both AI labs increases the level of risk it is exposed to, the growth potential it gains from these deals makes the risk appear well worth it.
