【Financial Preview】Can Broadcom, the No.2 AI stock, become the next Nvidia?

● The management of BroadCom commented that "AI business is growing rapidly and there is no slowdown in demand" and "VMware is transitioning to a subscription model, with prices increasing by about 2.5 times".

● Citi analyst maintains a buy rating and a target price of $175 for the company. Citi pointed out that following Google, Meta, and ByteDance, OpenAI is likely to become the 4th largest ASIC (custom chip) customer of BroadCom. ● The management of BroadCom commented that "AI business is growing rapidly and there is no slowdown in demand" and "VMware is transitioning to a subscription model, with prices increasing by about 2.5 times".

●Bank of America Corp has nominated Broadcom as one of the top AI companies alongside Nvidia.

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

OpenAI CEO Sam Altman stated in February that the company plans to raise $7 trillion to develop AI chips. Citi predicts that after Google, Meta, and ByteDance, OpenAI has a high possibility of becoming Broadcom's 4th largest ASIC (custom chip) customer, and expects Broadcom to ship products to OpenAI in the second half of 2025 and beyond.

Management at Broadcom expects that major tech companies will not slow down investments in XPU clusters over the next 3-5 years, and anticipates the scale to grow from 0.1 million clusters this year to 1 million clusters. Furthermore, Broadcom emphasized that there are no signs of slowing AI demand.There are no signs of slowing AI demand.emphasized.

However, the cost of ASICs is often higher than general-purpose computation 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 the cloud computing company VMware last year for $69 billion. VMware is currently part of Broadcom's infrastructure software division, which assists in managing and securing enterprise on-premises and hybrid cloud environments.

After the acquisition by Broadcom, VMware transitioned from perpetual licenses to subscription services, which corresponds to about a 2.5-fold increase in average selling price (ASP). Hock Tan, the CEO, mentioned at the Q2 earnings call that they have signed contracts with nearly 3,000 of the 10,000 customers since the acquisition completion. Revenue from VMware is expected to grow by double digits compared to the previous year until the end of this quarter.Analysts anticipate that sales from VMware will increase from $2.7 billion to over $4 billion, and they expect this growth to continue.

According to Seeking Alpha, the forward PE ratio for Broadcom until FY2024 is 34.28 times. In contrast, the forward PE ratio for NVIDIA until FY2025 is 42.01 times. Considering NVIDIA's advantage in AI, Broadcom seems slightly overvalued.

The implied move for Broadcom on September 5th was ±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.±7.5%The implied move for Broadcom on September 5th was ±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.

Based on the skewness of option volatility, the current market sentiment is slightly bearish towards Broadcom.