Broadcom Bets Big On AI: Possible New Partnership With OpenAI Sparks Rally

Broadcom reported stronger-than-expected Q3 results, driven by accelerating AI demand, and announced the addition of a fourth major custom AI chip customer, potentially OpenAI. This new client is projected to contribute an incremental $10 billion in revenue in H2 FY26, significantly raising Broadcom's FY26 AI growth forecast to approximately 110%. This development, coupled with a reported $110 billion backlog, led to a rally in AVGO shares and widespread analyst upgrades to price targets.

Analysis

Broadcom has demonstrated significant operational momentum, reporting fiscal third-quarter results that surpassed consensus with revenue of $16 billion and EPS of $1.69, driven by accelerating AI-related demand. The company's forward guidance for Q4 projects revenue of $17.4 billion and an implied EPS of $1.86, also exceeding market expectations. The most material development is the addition of a fourth major custom AI chip customer, speculated to be OpenAI, which is expected to contribute an incremental $10 billion in revenue during the second half of fiscal 2026. This single contract effectively doubles Broadcom's projected AI growth for FY26 to approximately 110%, up from a prior forecast of 55-60%. Current AI revenue strength is robust, with $5.2 billion in Q3 (+63% YoY) and a forecast of $6.2 billion for Q4, putting the company on a path toward $20 billion in AI revenues for fiscal 2025. This performance, favorably compared to Nvidia's strength and contrasted with Marvell's weaker results, is underpinned by a total backlog exceeding $110 billion, providing substantial business visibility for the next two years. The market has responded positively, with the stock rallying over 9% and multiple analysts raising price targets to the $360-$400 range.

Key Decisions for Investors

• Given the doubling of the fiscal 2026 AI growth forecast to 110% and a backlog exceeding $110 billion, investors should re-evaluate Broadcom's valuation, as it solidifies the company's position as a core beneficiary of secular AI infrastructure spending.
• Monitor progress toward the fiscal 2025 AI revenue target of approximately $20 billion and watch for confirmation of the new customer's identity and any further program expansions, which could provide additional upside beyond current forecasts.
• Consider the stock's performance in the context of its peers; its results are being compared favorably to Nvidia's, suggesting it is a key player in the high-performance AI semiconductor space, potentially justifying a premium multiple.
• The extension of CEO Hock Tan's tenure through 2030 reduces leadership transition risk, providing a stable execution outlook that should be factored into long-term investment theses.