Broadcom: AI Business Set to Triple in Three Years

The Broadcom management outlined three key factors that are currently attracting investors:

1. Soaring AI Business Growth: Broadcom's AI market exposure has expanded to an annual range of 30 billion to 50 billion, with no signs of demand slowdown.
2. VMware's Shift to Subscription Model: This transition equates to a 2.5x increase in average selling prices (ASP).
3. Robust Cash Cow: Generating 45%-50% of revenues as free cash flow, with 50% of this allocated to dividends.

I. Rapid AI Business Expansion
Over the next 3-5 years, Broadcom's annual AI market potential is projected to reach between 30billionand50 billion, significantly surpassing its fiscal year 2024 target of $11 billion. The company's revenue streams will primarily stem from major internet corporations.
AI chip customers are broadly categorized into two groups:
Public Cloud Providers
Large Consumer AI Platform Customers (including Google, Meta, ByteDance, etc.)
The projected market size of 30 billion to 50 billion stems from Broadcom's focus on the latter group, whose business models (e.g., targeted advertising, recommendation engines) favor high-efficiency, low-power custom AI chips (Broadcom ASICs). Management anticipates these large consumer AI clients will continue to invest heavily in xPU clusters, scaling from 100,000 clusters this year to 1 million over the next 3-5 years, with no sign of demand slowdown.
Each cluster's capital expenditure is estimated at 40 billion, with Broadcom capturing approximately 25 billion of this (inclusive of computing and networking, excluding utilities). This translates into a potential AI market for Broadcom ranging from 30billionto50 billion annually over the next 3-5 years.

II. VMware's Transition from Perpetual Licensing to Subscriptions
VMware's shift from perpetual licensing to subscriptions is expected to elevate quarterly revenues from 2.7billiontoover4 billion, sustainably. This pricing model change significantly increases ASP by approximately 2.5x.
One-third of VMware's customers have already transitioned to the subscription model, while the remaining two-thirds are poised to contribute incrementally to revenue growth through higher unit prices.

III. Cash Flow & Dividends
Broadcom's cash cow status remains robust, poised to fuel further ROE enhancement. The company currently generates free cash flow of 45%-50% of sales, enabling an increased dividend payout ratio of 50%, translating to $2 billion per quarter. This represents a significant increase from the 40% and 42% payout ratios in 2022 and 2023, respectively.