Complex data center workloads, such as training machine learning models and running artificial intelligence (AI) applications, would take a very long time if they were powered solely by central processing units (CPUs). To this end, specialized semiconductors are used to accelerate computation-intensive AI tasks.
In that semiconductor vertical, Nvidia(NASDAQ: NVDA) graphics processing units (GPUs) have become the industry standard. In fact, according to analysts, the company has a market share of between 80% and 95% in the field of AI accelerators. But Nvidia shareholders recently received some worrying news from their rival Broadcom(NASDAQ:AVGO).
Broadcom sells a range of semiconductor products, including combination Wi-Fi and Bluetooth chips Apple And Samsung smartphones, as well as network chips Arista switches. But Wall Street is particularly fascinated by its leadership in application-specific integrated circuits (ASICs). ASICs are chips built specifically for specific use cases, such as accelerating artificial intelligence (AI) workloads.
Analysts estimate that Broadcom has about a 60% market share in custom AI chips thanks to its relationships with three hyperscalers, a term that refers to companies with massive data center footprints. Although Broadcom has not identified its hyperscale customers, analysts generally believe they are Google’s parent company Alphabet, Metaplatformsand TikTok parent ByteDance.
Broadcom estimates that revenue from its three existing hyperscale customers will range from $60 billion to $90 billion in 2027, up from $12.2 billion in 2024. In other words, the company expects sales of custom AI chips to increase over the next three years will increase by at least 70% per year. year, but perhaps 95% per year.
That’s disappointing for Nvidia shareholders, because it means Broadcom will likely gain market share in AI accelerators. Analysts from Morgan Stanley estimate that ASICs will make up 13% of AI accelerator sales in 2027, up from 11% in 2024. They also think this figure could reach 15% by 2030. But there’s more bad news for Nvidia shareholders.
Broadcom CEO Hock Tan told analysts during the company’s fourth-quarter earnings call that Broadcom has selected two new hyperscalers that are likely to be revenue-generating customers by 2027. That means revenue from custom AI chips could grow even faster than 95% per year in the coming years. few years. Importantly, while Broadcom has not identified the customers, analysts believe they are Apple and ChatGPT maker OpenAI.
Image source: Getty Images.
I mentioned Broadcom chosen two additional hyperscalers as potential customers. CEO Hock Tan himself used that word because Broadcom won’t develop ASICs for small businesses, and small businesses have no interest in using custom AI chips.
There are two reasons for this. First, designing ASICs is expensive, so the customer must have a data center large enough to justify the cost. Piper Sandler Analyst Harsh Kumar recently told CNBC that each chip costs about $500 million to design, so it wouldn’t make financial sense to work with customers who can only order a few thousand. Instead, orders must be between 250,000 and 500,000 units.
Second, custom chips are less flexible because they are designed for specific workloads and lack supporting software development tools. Nvidia provides a robust ecosystem of code libraries and pre-trained models that streamline GPU application development. Such tools do not exist for ASICs. This means that deploying custom chips requires a high degree of technical expertise, limiting Broadcom’s customer base.
Furthermore, companies experimenting with ASICs may ultimately decide that the costs outweigh the benefits. Antoine Chkaiban of New Street Research says only two companies have deployed custom AI silicon at scale: Google and Amazon. So Nvidia is well positioned to maintain its leadership in AI accelerators. Bank of America Analysts estimate it will capture a 75% market share by 2030, down only slightly from 80% in 2024.
Looking ahead, Wall Street thinks Nvidia’s adjusted earnings will grow 34% annually through fiscal 2027, which ends in January 2027. That consensus makes the current valuation of 53 times adjusted earnings seem very reasonable. Potential investors can buy a few shares with confidence, and current shareholders have good reason to be optimistic about the future.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Bank of America is an advertising partner of Motley Fool Money. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Trevor Jennevine holds positions at Amazon, Arista Networks and Nvidia. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Arista Networks, Bank of America, Meta Platforms and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Nvidia Stock Investors Just Got Bad News from AI Semiconductor Rival Broadcom, originally published by The Motley Fool
