Broadcom lays its cards on the table: AI business triples in three years | AI dehydration

Author: Zhang Yifan

Editor: Shen Siqi

Source: Hard AI

In the US stock AI targets, Broadcom's position has been elevated once again.

On July 14th, Bank of America, in a conference call, listed Broadcom as a top AI pick along with NVIDIA.

During the call, Broadcom's management showcased three key factors that are currently attracting investors to the company:

1. Rapid growth in AI business: Broadcom is facing an AI market size increase to $30-50 billion annually, with no signs of slowing demand;

2. VMware's shift to a subscription fee model, equivalent to a 2.5 times increase in average selling price;

3. High-quality cash cow: Free cash flow reaching 45%-50% of revenue, with 50% used for dividends;

I. Rapid Growth in AI Business

In the next 3-5 years, Broadcom's potential market for AI business will reach between $30 billion and $50 billion annually, while the company's target for the fiscal year 2024 is only $11 billion. Broadcom's revenue source will mainly be large internet companies.

Currently, AI chip customers are divided into two main categories ——

(1) Public cloud providers;

(2) Large consumer AI platform customers (such as Google, Meta, ByteDance, etc.);

Regarding the origin of the "$30 billion to $50 billion" figure, the management further explained that:

Broadcom's business mainly focuses on the second type of customers because these customers' business models (such as targeted advertising, recommendation engines) prefer custom AI chips with high energy efficiency and low power consumption (Broadcom ASIC).

The management believes that these large consumer AI customers will not slow down their investment in xPU clusters in the next 3-5 years, with the scale increasing from 100,000 clusters this year to 1 million clusters. Broadcom emphasizes that the most important thing is that there are no signs of demand slowing down before reaching this scale.

With each cluster capital expenditure of $40 billion, Broadcom's services can account for $25 billion out of the $40 billion (including computing, networking, excluding power, etc.), which means that in the next 3-5 years, the potential market for Broadcom's AI business will reach between $30 billion and $50 billion annually.

II. VMware Shifts from Perpetual Licensing to Subscription Services

VMware is shifting from perpetual licensing to subscription services, with future quarterly revenue expected to increase from $27 billion to over $40 billion, and sustainable.

Most importantly, this shift in pricing model is equivalent to a significant price increase. After transitioning to a subscription model, VMware's average selling price (ASP) is expected to increase by approximately 2.5 times.

One-third of customers have already transitioned to the subscription model, and the remaining two-thirds of users will continue to contribute to the high profit growth brought about by the rise in unit price

III. Cash Flow and Dividends

Broadcom's cash cow attributes will continue to maintain high growth, which will benefit the further improvement of ROE.

Currently, the company's free cash flow accounts for over 45-50% of sales. Therefore, further increasing cash flow dividends to 50% would mean reaching $2 billion per quarter, while this ratio is only 40% and 42% in 2022 and 2023 respectively