Piper Sandler analyst Harsh V. Kumar reiterated an Overweight rating on Broadcom Inc
Kumar hosted a meeting with AVGO's management on Tuesday. He noted AVGO as a premier player in the generative AI computing space.
The analyst said the returns for hyperscalers are clear once the company can run its workloads on hardware with greater power efficiency, such as the XPUs that Broadcom provides.
However, companies are still hesitant to adopt these programs at the enterprise level as they cannot discern a clear ROI.
Management sized a potential 1 million unit cluster as a $50 billion opportunity, split between $20 billion for computing, $20 billion for networking, and $10 billion on other critical system elements.
Despite this sum, management explained that a finite number of firms are willing to step up and make that commitment, Kumar flagged.
The company now has 3 SKUs for the product versus 700+ when it was standalone. Additionally, the standalone business had 16 different routes to market, while the AVGO-managed entity now has two primary market streams, the analyst noted.
With that change, headcount reduction can occur, and sales complications diminish significantly. As per the analyst, this also creates better customer appreciation and more sticky business.
Kumar noted AVGO as 1-1.5 years ahead of the competition in the Switch Products category, with the Jericho and Tomahawk series both as market leaders for the industry.
Broadcom has significantly intensified its investments in this space as others have scaled back their R&D levels.
He noted that Jericho-3 AI is currently in production and shipping to customers, and the company is already working on iterating for the next generation.
Management also stated that Tomahawk 5 is still shipping very well and is one of the most successful products. According to the analyst, the switch is roughly 1-2 years ahead in technology compared to peers.
Kumar highlighted that Broadcom is more focused on scaling out, which entails large-scale clusters fully integrated via networking and acting as a single computer, versus other critical players in the accelerator market, looking to provide a system-level solution to the market and scale up.
Management outlined that the XPU business's gross margins are slightly lower than those of the traditional silicon business due to HBM's pricing.
Despite this, operating margins have remained relatively stable for the industry and are very attractive for the company, Kumar noted.
As these engagements are long-lasting, there is a high level of visibility with these products.
Broadcom could be in pole position for the next generation of custom chips with these customers, the analyst said.
Kumar projected second-quarter revenue and EPS of $12.04 billion and $10.85.
Barclays analyst Tom O'Malley maintained Broadcom with an Overweight and raised the price target from $1405 to $1500.
Price Action: AVGO shares traded lower by 2.63% at $1,294.09 on the last check Wednesday.
