(AVGO), (GOOG), (META), (AMZN), (NVDA), (TSM)
Last weekend, while cleaning up my home office, I came across an old Intel 486 processor I'd kept as a memento from my first custom-built PC.
Funny how things change - that chip had about 1.2 million transistors. Today's AI accelerator chips? We're talking billions.
This old relic got me thinking about Broadcom (AVGO) and the recent market hysteria over AI chip competition.
Speaking of hysteria, let me tell you about the market's latest panic attack. When news broke about DeepSeek's supposedly cheaper-to-train Chinese language model, investors acted like someone had just announced the death of AI.
Over $1 trillion in market cap vanished faster than a plate of cookies at a board meeting.
And here's the kicker: DeepSeek reportedly spent just $5.6M on training compared to Google (GOOG) DeepMind's Gemini at $191M and OpenAI's GPT-4 at $78M.
Broadcom took a nasty hit in this selloff, dropping 17.3% at its worst.
That's quite a haircut for a company that just reported AI-related revenues of $12.2B - a whopping 41% of their semiconductor business in FY2024. For more context, that's up 21 percentage points year-over-year.
But here's where it gets curious. While having lunch with a semiconductor industry veteran the other day, he couldn't stop talking about Broadcom's custom ASIC business.
These aren't your garden-variety chips - they're custom-designed AI accelerators for the likes of Google, Meta (META), and Amazon (AMZN). And guess what? All these companies are ramping up their AI spending, not cutting back.
The numbers tell an intriguing story. Taiwan Semiconductor Manufacturing Company (TSM), the world's leading chip manufacturer, reports that their advanced 3nm and 5nm chips now represent 60% of revenue, up 8 points quarter-over-quarter and 10 points year-over-year.
That's not the trajectory of a dying industry - that's a growth story with legs.
Want to talk about margins? NVIDIA (NVDA) has been enjoying gross margins of 75% in their latest quarter, up from 61.2% in FY2019, though down a bit from their peak of 78.4%.
When you're making margins like that, you're practically printing money. No wonder hyperscalers are looking at custom ASICs as an alternative - and that's where Broadcom shines.
Looking ahead, analysts expect Broadcom to grow revenue and earnings at a CAGR of 16.3% and 23.1% through FY2027.
That's not just impressive - it's an acceleration from their already robust historical growth of 17.9% and 18% between FY2019 and FY2024.
The stock isn't exactly cheap at 34.85x forward earnings, up from its 5-year mean of 20.11x.
But in the context of the sector, with a forward PEG ratio of 1.69x compared to the sector median of 1.82x, it's still digestible.
NVIDIA, by comparison, trades at 40.66x forward earnings with a PEG ratio of 1.07x.
Yes, the dividend yield has dropped to 1.07% from its 5-year average of 2.76%, but that's what happens when your stock becomes a market darling.
Short sellers seem to agree - they've reduced their bets against Broadcom by 7.9% compared to last year.
Here's my bottom line: The market's reaction to DeepSeek looks like a classic case of throwing the baby out with the bathwater.
Broadcom isn't just riding the AI wave - they're helping build the surfboard. Their custom ASIC business is perfectly positioned as tech giants look to optimize their AI infrastructure costs.
That old 486 processor sitting on my desk reminds me of an important lesson: in tech, it's not about where we've been, but where we're going.
And Broadcom? They're headed toward the next generation of AI chips, with volume shipments of 3nm ASICs scheduled for the second half of fiscal 2025.
For now, I'm calling this one a Buy on any pullbacks. Sometimes the market hands you a gift wrapped in panic - this might be one of those times.
