Shares of semiconductor company Broadcom Inc. (AVGO) have rallied more than 57% so far this year. I believe that the stock will continue to rise. Major reasons why I’m bullish on Broadcom include unique AI-centered solutions – hardware and software – as well as strong cash returns. Broadcom places strong emphasis on custom processing solutions, known as XPUs. These custom solutions are expected to become increasingly vital, especially for hyperscale computing providers.
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Interestingly, Bank of America recently noted that Broadcom’s AI opportunity is valued at $100 to $125 billion. Broadcom Inc. generates about 25% of its revenues from artificial intelligence (AI) products. The company has made rapid progress in complexity, particularly in large language models (LLMs). This is expected to necessitate a tenfold increase in processing power with each new generation of AI technology.
Alongside the growth in AI, Broadcom is also confident about the concurrent rise in networking demand, particularly with Ethernet technology.
Broadcom Sees Robust Demand for AI Chips
Broadcom’s top 4-5 hyperscale customers are expected to build clusters with around 1 million XPUs, a term referring to a range of specialized processors, including ASICs (application-specific integrated circuits) and GPUs (graphics processing units). This is expected to significantly increase Broadcom’s total annual market opportunity in compute and networking.
Broadcom said recently that it sees $12 billion in sales from AI parts and custom chips in Fiscal 2024. The company anticipates that ASICs, excluding networking components, will capture approximately 20% of this market share. Broadcom projects a shift in the AI spending patterns, with networking expected to grow from 15-20% to 20-25% of overall AI expenditure.
The growth is attributed to the increasing importance of connecting XPUs, which are becoming a larger part of the technology investment pie. Despite this shift, Broadcom anticipates that the ratio of spending on compute versus networking will remain approximately 2:1 in the near to medium term. Another reason to stay very positive on AVGO is the fact that the company is actively working on co-packaged optics technology, which is seen as a key innovation for future networking needs.
AVGO to Gain from VMware’s Recurring Software Revenue
Broadcom recently completed its acquisition of VMware for $69 billion, marking a major step in the company’s strategy to expand its multi-cloud offerings. VMware is in the process of transitioning its business model, with around 50-60% of its offerings now converted to a subscription-based service.
This shift is expected to result in approximately a 2.5 times average selling price (ASP) uplift compared to its prior perpetual licenses. VMware is on track to achieve a quarterly revenue run rate of over $4 billion in the upcoming quarters, a significant increase from the $2.7 billion reported in April 2024.
Despite the expectation of a growth slowdown as more customers complete their transition to the subscription model, Broadcom forecasts that VMware’s business will expand at a compound annual growth rate (CAGR) of 5-10% over the long term. This growth is projected to come from approximately 5% market consumption growth and an additional 5% from Broadcom-specific services and value additions.
The focus for Broadcom remains on VMware’s top 10,000 accounts, with the expectation of minimal customer churn due to the lack of viable alternatives to VMware’s services in the market. This makes me very bullish on AVGO.
Why OpenAI Chips Are Important for Broadcom
The launch of OpenAI’s custom AI chip is expected in the second half of 2025, with a second-generation chip expected to follow in 2026-2027. These chips are likely to be manufactured on TSMC’s advanced 2/3nm process, with a subsequent iteration at 1.6nm.
The company is poised to benefit from this development as it is believed to have secured partnerships for both first and second-generation AI custom ASICs designed for OpenAI. Broadcom’s potential engagement with OpenAI could unlock a revenue opportunity exceeding $16 billion annually, according to Mizuho.
This projection is based on the assumption that Broadcom could capture approximately 10% of the search query market share, with an assumed cost of $0.04 per query. If realized, Broadcom would position itself as second in the accelerator market, trailing only behind Nvidia.
Is AVGO Stock a Buy, According to Analysts?
According to TipRanks, Broadcom stock earns a Strong Buy consensus rating, with as many as 23 out of 26 analysts assigning a Buy. The highest price target on Wall Street is $240 per share, while the lowest is $170. The 12-month average AVGO stock price target of $199.80 implies 15.2% upside potential from current levels.
In addition to positive comments at Bank of America, Mizuho analysts also weighed in positively on the outlook for AVGO. They increased their price target for Broadcom stock to $220 from the previous target of $190, citing the potential for the company to capitalize on a significant market opportunity presented by new hardware platforms that are expected to integrate OpenAI’s ChatGPT5+ technology.
Truist Securities analysts also gave bullish comments on Broadcom recently, hiking the price target to $205 per share. They are optimistic about AVGO stock for its “AI growth, dividend momentum, and M&A benefits.” AVGO offers a dividend yield of 1.2%.
Conclusion
Broadcom is well-positioned for growth, driven by its AI-focused hardware and software solutions, including custom processors like XPUs and ASICs. The company’s massive AI opportunity is boosted by increasing demand from hyperscale computing providers and Ethernet technology.
Moreover, Broadcom’s co-packaged optics innovation is also seen as a key development in future networking needs. Its $69 billion acquisition of VMware has expanded its multi-cloud offerings, with the transition to a subscription model projected to grow revenue significantly. Overall, the company’s AI prospects and the VMware deal support my bullish stance.
