Poseidon Rating: Buy

12-month Target price: USD240

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Investment Highlights

1. AI Growth Drives Core Valuation Reassessment:

Broadcom achieved revenue of USD 14.9 billion in Q1 of Fiscal Year 2025, up by 25% year-over-year. AI-related revenue reached USD 4.1 billion, growing by 77% year-over-year. As customers continue to invest heavily in AI custom chips (XPU) and Ethernet networking, our views are in line with the company projections that AI-related revenue will account for nearly 50% of total revenue by FY2027.

2. Custom ASIC Facing Short-Term Pressure:

Recent market rumors suggest potential Capex (capital expenditure) reductions, with some large customers also advancing their in-house chip development, causing some industry turbulence. However, the “customized” nature of ASICs will remain crucial for the next phase of AI applications.

3. Subscription Transformation Enhances Software Revenue Stickiness:

VMware’s transformation has shown initial success, with over 60% of customers moving from perpetual licenses to subscription-based models. The customer base is stable, with high gross margins, providing robust cash flow support.

4. Strong Free Cash Flow, Stable Valuation:

Free cash flow for FY2025 is estimated to reach USD 3.1 billion. The company plans to return 50% of free cash flow to shareholders annually, suggesting significant potential for dividend growth.

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1. Company Overview

Broadcom Inc. is a global technology leader that designs, develops, and supplies semiconductor and infrastructure software solutions. The company has a 60-year history of innovation, originating from AT&T/Bell Labs, Lucent, Hewlett-Packard, and through acquisitions of companies like LSI, Brocade, CA, Symantec Enterprise Security, and VMware. Broadcom maintains worldwide design and engineering resources, focusing on complex digital and mixed-signal CMOS-based devices and analog III-V products. Its products are used across various end markets, including enterprise/data center networking, home connectivity, broadband access, telecommunications, smartphones, servers, factory automation, and alternative energy systems.

2. Business Structure Overview

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3. Semiconductor Solutions

Custom Compute (Custom ASIC)

Develops customized AI acceleration chips for hyperscale customers like Google, Meta, and ByteDance, used in large-scale XPU/GPU clusters. This segment posted Q1 FY2025 revenue of USD 2.2 billion and we expect this segment to grow circa 20% each quarter over the next four quarters. Compared to NVIDIA’s general-purpose GPUs, Broadcom’s ASIC solutions offer customers more efficient and controllable options.

o Higher gross margin for custom ASICs:

Due to their customized nature and longer contract periods, custom ASICs generally enjoy higher gross margins than standard chips. After the VMware acquisition, Broadcom’s overall gross margin stabilized at approximately 75%. A drop in ASIC gross margin may indicate rising production costs or supply chain disruptions; conversely, a further increase in gross margin would bolster the company’s valuation and its competitive edge in the AI chip market.

o R&D investment in new-generation ASIC technologies:

Research and development is a key driver of future growth (and a “moat” against external competition or the threat of hyperscalers’ in-house designs). In particular, R&D is paramount in sub-5nm process technologies and AI-optimized designs. However, such investments may bring short-term cash flow consumption and profit pressure.

Under pressure from both industry peers like Marvell and customers such as Meta and Google developing their own chips, Broadcom must maintain a robust R&D pipeline to sustain long-term revenue potential. We believe that should the company maintain its annual R&D expenditure of USD 5 billion and above, it will be able to sustain the competitive edge.

Wireless Communications

Serves high-end smartphone manufacturers such as Apple, as well as IoT device vendors, providing RF front-end modules and Wi-Fi/Bluetooth chips (BCM series). Apple accounts for around 80% of wireless business revenue, with a multi-year agreement renewed in 2023 supporting Wi-Fi 6E/7 product updates. Nevertheless, this segment faces high customer concentration and the potential challenge of Apple’s in-house RF modules.

Enterprise Storage

Broadly deployed in enterprise-grade servers and storage architectures, especially VMware’s vSAN systems. Key products include MegaRAID controllers, HBAs, PCIe switch chips, and SAS/NVMe controllers, with customers spanning Dell EMC, HPE, Lenovo, IBM, and other major OEMs. These products feature extensive vertical integration and protocol support capabilities.

Industrial & Automotive

Covers in-vehicle Ethernet, ADAS, and industrial automation equipment, including automotive transceivers, sensor modules, and industrial-grade Wi-Fi/Bluetooth chips. Although this market is currently in a downturn, with Q1 FY2025 revenue of only USD 150 million, it is expected to benefit from structural expansion driven by EVs and intelligent driving in the long term.

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4. Infrastructure Software: Strategic Pillar

VMware (acquired in 2023)

VMware’s product suite includes vSphere, NSX, vSAN, and Tanzu, widely deployed in finance, telecommunications, government, and other sectors with strong demand for private and hybrid cloud architecture. Currently, over 60% of customers have shifted to subscription-based models. Broadcom has also partnered with NVIDIA to launch the Private AI Foundation platform, already adopted by 39 enterprises.

Symantec Enterprise Security (acquired in 2019)

Products include endpoint protection, email/web security, DLP, and behavior analytics, serving global banking, government, and enterprise clients. Its architecture aligns with Zero Trust principles, supporting rising demand in cybersecurity spending.

CA Technologies (acquired in 2018)

Provides core support for mainframe systems and DevOps automation, with a client base comprising traditional financial institutions, aerospace, and insurance companies. Products support z/OS systems and IT operations automation, forming a stable source of cash flow.

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5. Customer Structure & Business Stickiness

6. Technological Moat & Strategic Advantages

1. Dual engines of hardware and software strengthen overall resilience to market cycles.

2. Highly customized integrated solutions increase customer stickiness and raise switching barriers.

3. Leading AI networking chips benefit from AI infrastructure expansion.

4. Comprehensive enterprise software ecosystem builds a closed-loop IT infrastructure.

5. Strong M&A integration capabilities; VMware’s transition rapidly unlocks free cash flow potential.

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7. Growth Prospects Outlook

In summary, Broadcom leverages its dual-engine model of “hardware + software” to continually expand in AI, network infrastructure, and enterprise software, underpinned by strong customer relationships and high R&D investments, resulting in a sustainable growth model. With over 70% market share in AI networking chips and accelerating software revenue growth from VMware’s subscription model, we believe that, despite short-term pressure in the custom ASIC segment, it remains a long-term growth driver. Broadcom maintains long-term partnerships with tech giants such as Apple, Google, and Meta, characterized by strong stickiness and high switching costs. Additionally, abundant free cash flow supports stable dividends and long-term strategic investments.

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