Monday, April 15, 2024

Unveiling the Potential: Is This AI Giant Next in Line for the ‘Magnificent Seven’?

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SAN JOSE, Calif. – In the ever-evolving landscape of technology giants, a new contender is rapidly rising to potentially claim a spot among the elite group of companies known as the “Magnificent Seven.” Broadcom Inc., a semiconductor and software behemoth, is broadening its reach and making waves with its recent acquisition of VMware, a move that could cement its position as a formidable force in the industry.

The “Magnificent Seven” is an informal designation for the seven most prominent and influential technology companies in the world. This prestigious group, which once comprised the renowned FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google), has undergone a transformation. With Netflix’s departure and the ascension of Nvidia and Microsoft, the lineup has shifted, reflecting the dynamic nature of the tech industry.

Broadcom’s Impressive Trajectory and Diversification Broadcom’s meteoric rise is undeniable. With a market capitalization of $575 billion, the company has surpassed industry titans like Tesla, solidifying its position as the 13th largest company globally and the 12th largest if Saudi Aramco is excluded. This remarkable feat is a testament to Broadcom’s strategic acquisitions and its ability to successfully integrate and optimize acquired businesses.

Unlike some of the Magnificent Seven companies that grew primarily through organic means before embarking on larger acquisitions, Broadcom has taken a different path. Under the leadership of CEO Hock Tan, the company has mastered the art of acquiring high-quality but underperforming tech businesses, seamlessly folding them into Broadcom’s corporate umbrella, and extracting maximum value from these acquisitions.

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The VMware Acquisition: A Game-Changer Broadcom’s recent acquisition of VMware in October 2022 has been a game-changer, propelling the company into new realms of innovation and diversification. Prior to this acquisition, Broadcom generated less than 25% of its revenue from software, with its primary focus being semiconductors for networking and communications.

However, with the integration of VMware, Broadcom now finds itself almost equally diversified between semiconductors and software, a unique position among tech giants. This strategic move has not only expanded Broadcom’s portfolio but also positioned the company to capitalize on the rapidly growing demand for hybrid cloud solutions.

VMware’s Virtualized AI Offering: A Potential Catalyst One of the key drivers behind Broadcom’s newfound software prowess is VMware’s virtualized AI product, the VMware Cloud Foundation (VCF). This innovative offering virtualizes large enterprises’ data centers, including compute, storage, and networking, providing a cloud-like experience within on-premises data centers.

Furthermore, VMware’s partnership with Nvidia, announced last summer, has paved the way for the VMware Private AI Foundation, which enables customers to run AI models within their own data centers. This solution addresses the growing demand for privacy and security in AI applications, making it an attractive proposition for large corporations.

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Broadcom’s management is optimistic about VMware’s potential, projecting double-digit sequential revenue growth for the acquired company in each quarter of fiscal 2024. This ambitious forecast stands in stark contrast to VMware’s pre-acquisition growth rate of just 2% in the quarter preceding the merger.

AI Chip Dominance: A Lucrative Avenue Broadcom’s AI aspirations extend beyond software, with the company also boasting high-growth AI hardware businesses. In the networking realm, Broadcom dominates switch and router semiconductors through its Tomahawk and Jericho chipset brands, enabling lightning-fast Ethernet connections essential for AI training and inference.

Additionally, Broadcom’s custom ASIC (application-specific integrated circuit) business is experiencing a surge in demand. As cloud computing giants increasingly design their own in-house AI chips, Broadcom’s contribution of its intellectual property to third-party AI chips, such as Alphabet’s Tensor processing units, has become a lucrative endeavor.

These AI chip businesses have witnessed remarkable growth, evolving from near-negligible revenue just a few years ago to a projected $10 billion in revenue this year, accounting for 35% of Broadcom’s total 2024 semiconductor revenue.

Cyclical Growth and High Margins While Broadcom’s AI endeavors are garnering significant attention, the company’s other business segments should not be overlooked. Broadcom maintains strong partnerships with industry leaders like Apple, manufacturing radio frequency and wireless connectivity chips for the iPhone.

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Furthermore, Broadcom’s leading chipsets in cyclical broadband and wireless communications markets continue to contribute to the company’s overall strength and stability.

Valuation and Growth Potential Broadcom currently trades at around 26 times this year’s earnings estimates and offers a 1.7% dividend yield. This valuation positions Broadcom toward the lower end of the Magnificent Seven’s valuations while providing the highest dividend yield among the elite group.

Notably, Broadcom has consistently outperformed analyst estimates over the years, and the company has been raising its outlook for AI revenue with each passing quarter, suggesting a conservative approach by management. This leaves room for potential upside surprises and further growth.

Moreover, with VMware under its wing, Broadcom is no longer just a chipmaker but a diversified tech conglomerate with numerous platforms. This “broad” reach also expands Broadcom’s acquisition targets, enabling the company to hunt for new opportunities in both the hardware and software industries, increasing its potential for future growth.

As the technology landscape continues to evolve, Broadcom’s significant exposure to AI growth, coupled with its diversified offerings and strategic acquisitions, position the company as a strong contender to potentially join or even expand the elite group of the Magnificent Seven.

Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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