[Earnings Preview] Can Broadcom, the second largest AI stock, become the next Nvidia?

Bank of America has named Broadcom as one of the top AI companies alongside Nvidia.

According to moomoo, Broadcom's revenue for FY2024Q3 increased by 46.04% compared to the same period last year, reaching $12.963 billion.EPS is expected to decrease by 27.60% compared to the same period last year, reaching $0.56.、The EPS is expected to decrease by 27.60% to $0.56 compared to the same period last year.。

Broadcom's main AI business provides ASIC chips, which are necessary for consumer AI platforms, to companies such as Google, Meta, ByteDance, etc.

OpenAI CEO Sam Altman stated in February that they plan to raise 7 trillion dollars to develop AI chips. Citi predicts that after Google, Meta, and ByteDance, OpenAI is likely to become Broadcom's fourth-largest ASIC (custom chip) customer, with Broadcom expected to ship products to OpenAI in the second half of 2025 and beyond.

The management of Broadcom predicts that major tech companies will not slow down their investment in XPU clusters in the next 3-5 years. They pointed out that the scale will increase from 0.1 million clusters this year to 1 million clusters. Broadcom emphasized that there are no signs of slowing AI demand.However, ASICs often have higher costs than general-purpose computing cards. According to Morgan Stanley, the TCO (Total Cost of Ownership) of NVIDIA's GB200 is 44% lower than Google's TPUv5 and 30% lower than Amazon's Trainimium 2.But ASICs often have higher costs than general-purpose computing cards. Morgan Stanley reports that the TCO (Total Cost of Ownership) of NVIDIA's GB200 is 44% lower than Google's TPUv5 and 30% lower than Amazon's Trainimium 2.

However, the cost of ASICs is often higher than that of general-purpose computing cards. According to Morgan Stanley, the TCO (Total Cost of Ownership) of NVIDIA's GB200 is 44% lower than Google's TPUv5 and 30% lower than Amazon's Trainimium 2.

Broadcom acquired cloud computing company VMware for 69 billion dollars last year. VMware is currently part of Broadcom's infrastructure software division, which supports managing and securing on-premises and hybrid cloud environments for enterprises.

After the acquisition of Broadcom, VMware has transitioned from perpetual licenses to subscription services, which amounts to an approximately 2.5-fold increase in average selling price (ASP).According to CEO Hock Tan's earnings call in Q2, since the completion of the acquisition, VMware has contracted with nearly 3,000 out of 10,000 customers. Tan commented that revenue from VMware is expected to see double-digit growth year over year until the end of this fiscal year.Analysts predict that VMware's revenue from VMware will increase from $2.7 billion to over $4 billion and can continue to grow.

According to Seeking Alpha, Broadcom's forward P/E ratio until FY2024 is 34.28, while Nvidia's forward P/E ratio until FY2025 is 42.01. Considering Nvidia's advantage in AI, Broadcom is slightly overvalued.

Implied move for Broadcom on September 5th is ±7.5%, suggesting that the options market is betting on a 10.9% increase or loss after Broadcom's earnings. On the other hand, the average stock price volatility after Broadcom's past four quarters of earnings is ±6.8%, indicating that the current option price is slightly high.

From the skewness of option volatility, the current market sentiment towards Broadcom is somewhat bearish.