Financial Report Outlook | Not afraid of DeepSeek Impact? Is the future of AI for Broadcom Inc. (AVGO.US) still promising?

Broadcom Inc. (AVGO.US) will announce its first-quarter performance after the US stock market closes on March 6 (early morning of March 7 Beijing time). The market generally expects Broadcom Inc. to have a Q1 revenue of $14.61 billion, a 22% year-on-year increase, and an adjusted net profit of $7.39 billion, higher than the $5.25 billion in the same period last year. Ahead of this financial report release, the chip and artificial intelligence (AI) sectors experienced a sell-off late last week. Investors reacted to NVIDIA Corporation's (NVDA.US) earnings performance and new tariff policies. Although NVIDIA Corporation's performance exceeded Wall Street analysts' expectations, investors may have been expecting more while also worrying about the investment prospects in the AI field, as well as the potential impact of the Trump administration's tariff policies and restrictions on AI chip exports. Broadcom Inc.'s stock price fell 9% last week, dropping by about a quarter since reaching a historic high in December last year. AI-Driven Growth Opportunities Despite this, most investors still see favorable growth opportunities for Broadcom Inc. in the AI field. The proportion of AI-related revenue in Broadcom Inc.'s semiconductor business total revenue has increased significantly from less than 5% in 2019 to 41% in 2024. AI revenue has increased from $3.8 billion in 2023 to $12.2 billion in 2024, a 220% year-on-year growth. The company currently has three mega-scale customers planning significant AI roadmap executions over the next three years. By 2027, it is expected that each customer will deploy 1 million XPU clusters, bringing a $60 billion to $90 billion serviceable market for XPUs and network devices. Broadcom Inc. is well-positioned in this opportunity and is expected to capture a leading market share. Additionally, the company has also gained the favor of two mega-scale customers developing the next generation of AI XPUs. If these potential customers convert into actual orders, the serviceable market size will further expand. Furthermore, the company's robust financial performance provides support for Broadcom Inc.'s future. Over the past five years, the company has made significant improvements in financial metrics: revenue has increased from about $24 billion in 2020 to approximately $52 billion in 2024, with a compound annual growth rate (CAGR) of 21.2%; gross margin has increased from 73.5% in 2020 to 76.5% in 2024; adjusted EBITDA has grown from $13.6 billion in 2020 to $31.8 billion in 2024, with a CAGR of 23.7%; free cash flow has increased from $11.5 billion in 2020 to $19.4 billion in 2024. Based on strong cash flow, the company has returned a significant amount of capital to shareholders through dividends and stock buybacks. Impact of DeepSeek Over the past five years, Broadcom Inc. has delivered outstanding returns to shareholders, with the stock price increasing by approximately 615%, well ahead of the S&P 500 index's gain of about 80% during the same period. However, recent news related to Chinese AI DeepSeek has put significant pressure on the stock price. On January 27, Broadcom Inc.'s stock price plummeted by 17%. DeepSeek has achieved performance equivalent to OpenAI and Meta at significantly lower costs and fewer computing resources. This development poses a challenge to the Western companies' AI development model, which primarily relies on resource-intensive methods. While the rise of DeepSeek may lead to a decline in demand for high-end AI chips and potentially have a ripple effect on Broadcom Inc.'s technology and component business, analysts view this as a drive for demand for custom Application Specific Integrated Circuits (ASICs). Morgan Stanley analyst Harlan Sur recently stated in a research report that companies like Alphabet Inc. Class C (GOOGL.US), Microsoft Corporation (MSFT.US), Meta, and Amazon.com, Inc. (AMZN.US) are increasingly using custom ASICs as their AI accelerators due to their demand for computational efficiency and energy consumption. Therefore, Broadcom Inc., with a substantial ASIC business, is likely to be a major beneficiary. Sur wrote in a report to clients, "With the increased focus on computational efficiency (thanks to DeepSeek), we see AI ASIC projects accelerating to further improve computational efficiency and drive a more aggressive cost/compute curve." Currently, Sur has a "hold" rating on Broadcom Inc. and has set a target price of $250. These four mega-scale enterprises have driven Broadcom Inc.'s growth in custom ASIC business, but this has not stopped the company led by Hock Tan from expanding its customer base. Sur added that there are speculations that Broadcom Inc. may be collaborating with OpenAI to develop its autonomous processor (possibly launching as early as next year) and is also working with Armstill controlled by SoftBank (SFTBY.US). "In summary, if our expectations for the success of Broadcom Inc.'s projects are correct, we estimate that computing demand from only SoftBank may bring Broadcom Inc. the opportunity for 1 million XPU/clusters of Silicon (potential serviceable market size) in the next few years (potential revenue of $20 billion to $30 billion)," Sur added. Furthermore, Sur explained that if SoftBank/Arm entrusts its "Izanagi" AI chip project to Broadcom Inc., this could lead to Broadcom Inc. exceeding its recent forecast by 202? and beyond.A potential market size of $600 billion to $900 billion in fiscal year 7 will bring incremental growth.Although the stock price has recently fallen, analysts are generally optimistic about this chip manufacturer's stock. According to data tracked by Visible Alpha, out of the 13 analysts covering Broadcom Inc. stock, all except one have given a "buy" or equivalent rating, with an average target price of $259. This represents a potential upside of about 30% from last Friday's closing price of $199.45.