Broadcom's AI Chip Deal: Buy the Dip?

Broadcom (AVGO) and OpenAI have co-developed a custom AI chip called Jalapeño, designed for inference workloads. The chip went from design to completion in about nine months, with OpenAI's models aiding the engineering. The partners plan to deploy racks of these chips starting late this year, aiming for systems drawing 10 gigawatts of power.

This announcement comes as Broadcom's stock trades 24% below its 52-week high of $495, despite strong financial performance. In its fiscal second quarter, Broadcom reported AI semiconductor revenue of $10.8 billion, up 143% year over year. The company guided for AI chip revenue to grow over 200% this quarter to $16 billion, with total revenue expected to rise 84% to $29.4 billion.

Broadcom now has six core custom-chip customers, including OpenAI, Anthropic, Meta Platforms, and Alphabet (Google). The company's adjusted EBITDA margin was 69% of revenue, and it generated $10.3 billion in free cash flow last quarter.

The stock's decline is attributed to two main concerns: customer concentration risk (reliance on a few giant AI customers) and the economics of custom silicon, which typically limits pricing power for sellers.

Broadcom's custom AI chip strategy is a key growth driver, and the Jalapeño partnership with OpenAI validates its position in the AI hardware market. Custom accelerators are the fastest-growing niche in the chip industry, as they offer cost efficiency for specific workloads compared to general-purpose GPUs.

Despite the strong growth, the stock's discount reflects investor worries about concentration and pricing. However, at about 19 times forward earnings, the valuation is attractive relative to the growth rate. The company's massive free cash flow generation and dividend provide a margin of safety.

For investors, the key question is whether Broadcom can sustain its AI momentum. The customer list is deepening, and the shift to custom chips could expand margins over time. However, any slowdown in AI spending from major customers could pressure the stock.

This news also highlights the broader trend of hyperscalers developing custom silicon, which could impact competitors like NVIDIA. Broadcom's success in this niche positions it as a key beneficiary of the AI build-out.