The chip giant not to be overlooked in the AI boom! Broadcom's revenue surged by 43%, announcing a major stock split of "1 for 10"

According to the financial news app Zhitong Finance, Broadcom (AVGO.US), one of the biggest winners in the global AI boom, announced its financial report for the second quarter of the 2024 fiscal year ending on May 5th on the morning of June 13th Beijing time. Broadcom is one of the key chip suppliers for Apple Inc. (AAPL.US) and other major tech companies, as well as a core supplier for Ethernet switch chips for global large AI data centers and ASIC customized chips. Driven by the strong demand for chip products and software products related to AI business, the company's latest financial data and annual forecast data have far exceeded Wall Street analysts' expectations, leading to a more than 14% surge in after-hours trading on the US stock market. Additionally, the chip giant, whose latest closing stock price is close to $1500, also announced a 1-for-10 stock split plan.

Broadcom's latest financial report shows that excluding some special items, Broadcom's second quarter Non-GAAP earnings per share reached $10.96, compared to analysts' average expectation of $10.80, and $10.32 in the same period last year. Broadcom's second quarter total revenue also surged to $12.5 billion, higher than the analysts' average expectation of $12.1 billion, and a whopping 43% increase compared to the same period last year.

In the three months ending on May 5th, Broadcom's semiconductor business segment revenue reached $7.2 billion. This exceeded the analysts' average expectation of $7.12 billion and was higher than the already strong $6.8 billion in the same period last year. Broadcom's second quarter infrastructure software business revenue was $5.29 billion, surpassing the analysts' average expectation of $4.93 billion and significantly higher than the $1.9 billion in the same period last year.

In terms of performance outlook data that Wall Street analysts are focusing on, the company's performance guidance in the financial report section indicates that the total revenue for the entire fiscal year ending in October is expected to reach around $51 billion, higher than Broadcom's previous estimate of $50 billion in the previous financial report, and also higher than the recent average expectation of $50.6 billion from analysts who have been continuously raising their estimates.

Broadcom is a leader in RF chips for smartphones like Apple and in the wired and wireless communication fields. In terms of AI underlying hardware, the demand for Broadcom's Ethernet switch chips and ASIC chips based on Broadcom's data interconnect technology is extremely strong. It is rumored that tech companies like Google (GOOGL.US) and Microsoft (MSFT.US) often specifically request to purchase Broadcom's Ethernet technology-related hardware products.

Broadcom's Trident series chips are known for their high performance, high density, and energy efficiency, making them one of the key technologies for building modern large data center network infrastructure. The latest Trident 5-X12, as a member of the series, continues this tradition by providing advanced network bandwidth, low-power operation, high scalability, supporting the needs of next-generation data center networks, including support for AI training/inference workloads and machine learning workloads. The high performance and high port density of Trident 5-X12 make it very suitable for ultra-high-speed network requirements within modern data centers. In a global context, some data centers heavily rely on Broadcom's Ethernet switch chip and custom ASIC chip designs to build the underlying infrastructure systems for artificial intelligence. However, the company also sells hardware components related to automobiles, smartphones, and internet access devices. Additionally, the company is continuously expanding into the software field, including software products related to large-scale computing, network security, and data center optimization.

More importantly, with its absolute technical leadership position in chip-to-chip communication, Broadcom has become a key player in the field of AI ASIC custom chips in recent years. For example, Broadcom is a core participant in the development of Google's self-developed server AI chip - the TPU AI accelerator chip. In addition to chip design, Broadcom provides Google with crucial chip-to-chip communication intellectual property and is responsible for manufacturing, testing, and packaging new chips, thereby supporting Google in expanding new AI data centers.

The strong demand for Ethernet switch chips and ASIC custom chips closely related to AI has been evident in Broadcom's revenue data for the fiscal years 2023 and 2024, which have consistently exceeded expectations. In particular, AI ASIC custom chips have become an increasingly important source of revenue for Broadcom. Market reports indicate that there are rumors that major US tech giants Microsoft and Meta, the parent company of Facebook, will choose Broadcom as the core partner for their self-developed AI chips. Meta previously collaborated with Broadcom on the design of Meta's first and second-generation AI training accelerators, and it is expected that Broadcom will accelerate the development of Meta's next-generation AI chip MTIA 3 in the second half of 2024 and 2025.

Furthermore, the formal acquisition of VMware completed in November last year is a significant expansion move for Broadcom in the software business. Broadcom CEO Hock Tan stated during the earnings conference call, "We have made very significant and positive progress in integrating VMware and accelerating its growth."

Giants not to be overlooked in the AI frenzy! The global AI spending frenzy will be the revenue engine for "AI shovel" Broadcom

The global frenzy of enterprises deploying artificial intelligence has led to explosive growth trends in the performance of chip giants such as NVIDIA and Broadcom. The chip products provided by these giants are crucial for major technology companies to build infrastructure systems that drive heavyweight artificial intelligence applications such as ChatGPT - AI data centers.

Wedbush, a well-known Wall Street investment firm, stated that the profit environment for US tech giants still looks strong, especially considering the enthusiasm of enterprises and consumers for artificial intelligence, which has driven the soaring trend of tech stocks over the past year. Wedbush stated that extensive on-site research has given the firm great confidence in enterprise AI spending, with expectations that AI spending this year is likely to account for approximately 10% of enterprise IT budgets, compared to less than 1% in 2023 **

Although Broadcom does not sell the highly acclaimed data center server AI chips launched by the AI chip leader NVIDIA, Broadcom provides a range of core acceleration components for high-performance computing and network centers, including ultra-high-performance Ethernet switch chips crucial for data centers. In addition, Broadcom's core leadership position in ASIC customized chips in the AI field has greatly boosted Broadcom's performance from the global AI frenzy.

Broadcom's Ethernet switch chips are mainly used in data centers and server cluster equipment, responsible for efficiently and rapidly processing and transmitting data streams. **Broadcom chips are essential for building AI hardware infrastructure because they ensure high-speed data transfer between GPU processors, storage systems, and networks, which is crucial for generative AI applications like ChatGPT, especially those requiring processing large amounts of data input and real-time processing capabilities, such as Dall-E text-to-image, Sora video generation with text, etc. More importantly,Broadcom has become one of the most important players in the field of ASIC customized chips in the AI field. Not only has Google chosen to cooperate with Broadcom to design and develop customized ASIC chips, but giants like Microsoft and Meta, as well as more data center service operators, are expected to collaborate with Broadcom in the long term to build high-performance ASICs.

Broadcom CEO Hock Tan stated that the acquisition of VMware, driven by the AI boom, has also boosted software revenue. Tan emphasized that the company is actively seeing strong demand for Ethernet and AI customized ASIC chips from hyperscale data centers.

Hock Tan emphasized in the statement that Broadcom's incredibly strong performance in the second quarter was once again driven by the explosive demand for artificial intelligence and the focus on artificial intelligence virtual cloud software from VMware. Hock Tan stated that during this period, revenue from AI-related products alone reached a record $31 billion. "Next year, we expect most large-scale AI GPU deployments to be based on Ethernet. We expect the strong momentum of AI to continue." Hock Tan said at the earnings conference.

Tan predicts that the total revenue related to artificial intelligence for the full fiscal year 2024 will exceed $11 billion. Broadcom's non-artificial intelligence chip business revenue, which has been sluggish in recent years, also bottomed out in the second quarter. He said during a conference call with analysts that the second half of the 2024 fiscal year may see a mild recovery trend.

After the latest earnings report and performance outlook were released, Broadcom's stock price surged more than 14% in after-hours trading on the U.S. stock market. As of the New York stock market close this year, the stock rose as much as 34% to $1,495.51. In comparison, the stock outperformed the closely watched "global chip stock barometer" - the Philadelphia Semiconductor Index (.SOX) with a 32% increase, covering top chip companies such as NVIDIA, AMD, and Broadcom In addition, Broadcom, headquartered in Palo Alto, California, also announced a "1 for 10" stock split plan, expected to take effect on July 15th. Following in the footsteps of NVIDIA, Broadcom's stock split is set to take effect on June 7th.

One of the main reasons why stock splits can trigger a rise in stock prices is that it makes it easier for retail investors to buy high-quality fundamental stocks.

After the stock split plan, the price of the underlying stock will significantly decrease, meaning that high-quality fundamental stocks can attract more investors to participate in trading. Previously, these investors often hesitated due to high stock prices. For companies like Broadcom and NVIDIA with extremely strong fundamentals in the "AI chip" sector, the stock split undoubtedly boosts retail investor sentiment positively.

Historical data compiled by Goldman Sachs shows that since 2019, the 46 Russell 1000 index component companies that have completed stock splits have outperformed the S&P 500 index by 4 percentage points.

Broadcom - Now and in the future, one of the biggest beneficiaries of the AI boom

According to a well-known research institution IDC report, the total global investment in AI IT systems covering software, hardware, and other related services centered around artificial intelligence (AI) is only about $132.49 billion in 2022, but is expected to grow to $512.42 billion by 2027, with a high compound annual growth rate (CAGR) of 31.1%, and will focus extensively on the field of generative AI like ChatGPT.

IDC's latest survey shows that by 2027, 45% of enterprises are expected to master and use generative AI tools to jointly develop digital products and services, aiming to double their revenue growth compared to competitors. IDC also predicts that the global generative AI market's compound annual growth rate could reach 85.7%, and by 2027, the global generative AI market size will be close to $150 billion. All of this indicates that Broadcom, a leader in core AI infrastructure such as Ethernet switch chips and custom ASIC chips in the AI field, is poised to continue benefiting from this unprecedented AI boom in the coming years.

At the same time, the long-term growth trend of the network security and cloud services market closely related to AI will also enhance the growth prospects of Broadcom's software infrastructure business VMware. Analysts expect VMware to become Broadcom's core business, where Broadcom will create private clouds and virtual hybrid cloud environments for global enterprises and divest non-core assets VMware's cloud services mainly focus on virtualization and software-defined data center solutions, with its main product being VMware vSphere, used for building and managing virtualized infrastructures.

Prior to Broadcom's latest financial results announcement, Wall Street investment firms had strongly bullish outlooks on the company's stock price for the next 12 months. Melius Research, in particular, raised Broadcom's target stock price to $1850. Bank of America mentioned in their research report that investors should pay close attention to three major investment themes in the chip industry: cloud computing, automotive chips, and "complexity", with both Broadcom and NVIDIA being on Bank of America's list of "preferred chip stocks".

Bank of America, a major Wall Street firm, released a recent research report stating that the current chip industry recovery cycle began in late 2023 and is currently only in the third quarter, indicating that the strong recovery momentum may continue until mid-2026. Analysts at Bank of America pointed out that after experiencing an extremely sluggish downward cycle, the chip industry typically enters an upswing cycle lasting up to 10 quarters, and this pattern is just beginning