Broadcom Becomes Latest Chipmaker to See Its Stock Jump on a Deal with OpenAI. Is It Too Late to Buy the Stock?

Broadcom shares surged following its formal partnership with OpenAI to develop and deploy 10 gigawatts of custom AI accelerators, leveraging Broadcom's networking technology, with deployment commencing in H2 next year and completing by 2029. This significant deal positions Broadcom as a critical player in custom AI chip design, diversifying OpenAI's supply chain, and complements Broadcom's existing collaborations with major tech firms, which are projected to generate $60B-$90B by FY2027. The partnership, which is distinct from a previously undisclosed $10 billion customer, underscores Broadcom's substantial growth trajectory in the AI sector, with the OpenAI contract alone estimated to be worth over $100 billion annually.

Analysis

Broadcom (AVGO) shares experienced a significant jump following the formal announcement of a partnership with OpenAI to develop and deploy 10 gigawatts of custom AI accelerators, utilizing Broadcom's networking and Ethernet technology. This collaboration, with deployment commencing in the second half of next year and completion targeted by 2029, establishes Broadcom as a pivotal player in the custom AI chip market. The deal underscores OpenAI's aggressive strategy to diversify its chip supply chain and foster competition, as evidenced by its commitment to over 30 gigawatts of power capacity across multiple vendors.

The OpenAI partnership alone is projected to be worth upward of $100 billion annually, a substantial figure compared to Broadcom's projected total revenue of over $63 billion for its current fiscal year. This reinforces Broadcom's position as a leading provider of custom ASICs, building on existing collaborations with Alphabet, Meta Platforms, and ByteDance, which are expected to generate $60 billion to $90 billion by fiscal 2027. Notably, OpenAI is not the previously mentioned $10 billion customer, indicating further undisclosed significant opportunities for Broadcom.

Broadcom is poised for a powerful new growth phase, with revenue acceleration from these custom AI chips anticipated primarily in fiscal 2027. Despite a forward P/E ratio exceeding 38.5x fiscal 2026 analyst estimates, the company's PEG ratio of under 0.8 suggests an attractive valuation, implying potential undervaluation given its robust growth trajectory. This positions Broadcom as a compelling long-term growth story within the AI sector.

Key Decisions for Investors

• Monitor Broadcom's execution and timeline for the OpenAI custom AI accelerator deployment, particularly the H2 next year deployment start and 2029 completion, as these are crucial for realizing the projected $100 billion annual revenue.
• Assess Broadcom's ability to sustain its competitive advantage in custom ASIC design, especially given OpenAI's diversification strategy and the broader shift towards inference-focused AI.
• Consider the long-term growth potential from custom AI chips and networking, balancing the elevated forward P/E with the attractive PEG ratio and anticipated revenue acceleration from fiscal 2027.