Weekend Slow Read: AI "Selling Shovels" - Broadcom

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In this era of 'cooked food', it is common to only read the titles and abstracts of articles, and short videos are just brushed through. We hope to bring to everyone some articles that need to be read slowly over the weekend through this special topic. We don't give advice on whether to buy or sell. We just present all the information and data as comprehensively as possible to the readers, and they can make their own judgment whether it's bullish or bearish.

Broadcom Inc.The origin of Broadcom Inc. can be traced back to its predecessor Avago Technologies Limited, a company that was founded in 1961 and acquired Broadcom Inc. for 37 billion USD in 2016, and then renamed as Broadcom Limited. As a global leader in analog semiconductor equipment supply, the company is committed to providing various semiconductor products for wireless communications, wired infrastructure, enterprise storage, and industrial sectors. Its products are widely used in mobile phones, data networks, storage and telecommunications equipment, and industrial automation, etc.

The root of Avago Technologies can be traced back to a branch of Hewlett-Packard called Agilent Technologies, whose semiconductor business department later became Avago Technologies. Avago Technologies' business scope covers wireless and wired communications, industrial, automotive, consumer electronics, as well as storage and computing, etc. The company has long maintained a leading position in the market in areas such as opto-couplers, infrared transceivers, and optoelectronic devices.

In 1999, HP decided to spin off its chip manufacturing business to establish Agilent Technologies.In 2005, private equity firms KKR and Silver Lake Partners acquired the semiconductor business of Agilent Technologies for 2.66 billion USD, making it an independent Avago Technologies. Subsequently, through a series of strategic acquisitions, such as the acquisition of Nemicon in 2008, the acquisition of CyOptics and Javelin Semiconductor in 2013 and the acquisitions of PLX Technology and Emulex in 2014 and 2015, it further strengthened its leadership position in the semiconductor field.

In 2016, through the acquisition of the original Broadcom, the new Broadcom became the fifth largest semiconductor company in the world. In 2017, Broadcom announced the completion of the acquisition of network equipment manufacturer Brocade, and attempted to acquire mobile chip manufacturer Qualcomm, although the acquisition ultimately failed. In 2018, Broadcom acquired U.S. commercial software company CA Technologies for $19 billion, marking its diversified development into technology services beyond semiconductors.

Broadcom's series of acquisitions not only expanded its product line and increased computer communication chips, network processors, wireless connectivity products, and enterprise storage solutions, but also increased the company's share in the BAW market, making its product layout more complete. In recent years, as the semiconductor industry has shifted to the mobile product market, wearable devices, automotive electronics, and the Internet of Things, the industry's concentration has continued to increase, with Broadcom's market share rising to 3.8% and climbing to fifth place in the world ranking after the acquisition of the original Broadcom.

In the first quarter of the 2024 fiscal year, Broadcom presented impressive financial results, with total revenue reaching $11.96 billion, a 34% year-on-year increase. This performance not only reflects the company's strong competitiveness in the global market, but also exceeds analysts' widespread expectations ($11.73 billion). However, it is worth noting that despite the overall revenue showing excellent growth, the revenue of its semiconductor business unit was $7.39 billion, only a 4% year-on-year increase, falling short of the market's expected $7.7 billion. This data reveals the challenges facing the semiconductor business, especially the slowdown in sales in the smartphone and telecom infrastructure sectors.

Despite the semiconductor business revenue falling short of expectations, Broadcom's overall financial health remains strong. The company's operating cash flow was $4.815 billion, showing growth compared to the same period of the previous fiscal year, reflecting Broadcom's good cash flow management and operational efficiency. In addition, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) reached $7.156 billion, further verifying Broadcom's ability to maintain profit margins.

It is worth noting that Broadcom's return policy to shareholders is unusually generous, as the company announced to maintain a high dividend of $5.25 per share, reflecting confidence in its long-term commitment to shareholders. This not only strengthens the confidence of shareholders, but also attracts more investor attention, despite the short-term challenges in performance fluctuation.

As a global leading semiconductor company, Broadcom has a wide range of business operations covering various market sectors, including wired communications, wireless communications, enterprise storage, industrial, and others. Due to the diverse product line of Broadcom, the company has complex relationships with upstream and downstream enterprises and industries, forming a huge supply chain network.

Raw material suppliers: Broadcom requires various semiconductor materials to manufacture its products, including silicon wafers, chemicals, and gases, etc. These materials are usually provided by professional chemical and material science companies.

Semiconductor manufacturing equipment suppliers: Broadcom needs advanced semiconductor production equipment to manufacture its high-performance semiconductor products. This includes lithography machines, etching equipment, chemical mechanical polishing (CMP) equipment, etc., typically provided by companies such as ASML, Applied Materials, and KLA Corporation.

Semiconductor manufacturing services (Foundry Services): Although Broadcom has its own manufacturing capabilities, it also utilizes external foundries (such as Taiwan Semiconductor Manufacturing Company, GlobalFoundries, etc.) to produce certain products. These foundry service providers are crucial upstream partners for Broadcom, helping the company to flexibly adjust production capacity and leverage the technical advantages of foundries.

Broadcom, a manufacturer of wired and wireless communication equipment, provides various chips and solutions for this field. Its customers include Huawei, Cisco, Juniper, and Dell.

Broadcom, a manufacturer of consumer electronics products, widely applies its wireless connectivity and RF solutions in consumer electronics products such as smartphones, tablets, and smartwatches. Apple is one of Broadcom's important customers.

As cloud computing and big data continue to rise, the demand for high-performance network switches and storage solutions in data centers has increased significantly. Broadcom holds a strong market position in this field and provides key technological support to cloud service giants such as Google, Amazon, and Microsoft.

As automotive electronics and Industry 4.0 develop, Broadcom's products are increasingly used in automotive infotainment systems and industrial automation equipment.

Other areas include enterprise network and home network device manufacturers, as well as companies providing optical communication solutions.

In summary, Broadcom is located at the core of the global semiconductor industry chain, closely connected to numerous industries and fields. Its upstream depends on high-quality raw material supply and advanced manufacturing technology, while its downstream markets cover a wide range of electronic product manufacturers and technology service providers. Broadcom's business development is directly influenced by changes in global electronic market demand.

Against the backdrop of rapid development of artificial intelligence (AI) technology, Broadcom CEO Hock Tan explicitly stated that the global enterprise's large-scale investment in AI technology will be a key factor driving Broadcom's performance growth in the fiscal year 2024 and beyond. Despite Broadcom's latest revenue report in the semiconductor business slightly falling short of expectations, Tan emphasized that with continued investment by enterprises in the AI field, Broadcom's performance is expected to accelerate significantly.

Specifically, Broadcom expects that its spending on AI will significantly drive revenue growth in the AI-related field in the fiscal year 2024, with this growth expected to account for about 35% of its semiconductor business revenue, far surpassing Broadcom's previous expectations. This expectation not only demonstrates Broadcom's deep insights into the AI market, but also reflects the company's important position in the global AI technology supply chain.

Broadcom's positioning in the AI field highlights its strategic thinking as a technology and innovation leader. By providing high-performance Ethernet switch chips and customized AI ASIC chips for key customers such as data centers, cloud computing service providers, and tech giants, Broadcom is becoming a core force supporting the development of global AI infrastructure. In addition, with the widespread application of AI technology in various industries, Broadcom's deep cultivation in the AI field not only brings new growth momentum to the company