Broadcom’s $200 Billion Samsung Deal Shows How Costly the AI Memory Race Has Become

Key Points

• Broadcom and Samsung Electronics announced a five-year, over $200 billion agreement under which Broadcom will purchase memory and other chips from Samsung.
• The deal secures Broadcom's supply of High Bandwidth Memory amid shortages and price spikes, supporting its AI accelerator growth and potentially limiting margin pressure.
• The agreement also covers Samsung's 2-nanometer foundry process and may extend to advanced packaging, offering Broadcom a potential alternative to TSMC's constrained capacity.

Broadcom NASDAQ: AVGO is back in the news with another multi-billion-dollar semiconductor deal. However, this time, Broadcom is not on the receiving end of the commitment. Broadcom and memory chip giant Samsung Electronics OTCMKTS: SSNLF have announced a five-year agreement valued at over $200 billion, under which Broadcom will purchase various chips from Samsung.

Although this is money going out rather than coming in, there are still real positives to take away from the deal. Most notably, the agreement aids Broadcom in capitalizing on its AI chip demand by locking down the supply of a vital component. Let's dive into the details and what it means for Broadcom going forward.

Broadcom and Samsung’s Memory Pact: Securing Supply to Realize Growth

The deal contains two primary components, which Samsung outlines in the corresponding press release. Part one relates to memory, where “Samsung and Broadcom plan to pursue a strategic collaboration for the supply of industry-leading memory solutions, including High Bandwidth Memory (HBM), supporting Broadcom’s next-generation AI accelerators.”

Here, Broadcom is securing supply for Samsung’s HBM, which is a critical component within AI accelerators. This deal comes amid a drastic shortage in HBM as well as other memory products. For Broadcom, investors can think of this deal as a necessary evil as the company looks to execute on its massive AI accelerator opportunity.

Notably, the firm expects its AI semiconductor revenue to grow by more than 200% year over year (YOY) to $16 billion. With 10 gigawatts of data center commitments from large language model developers, Broadcom may have a path to generate $200 billion in AI semiconductor revenue in 2027 or beyond.

However, HBM is a non-negotiable component within AI accelerators. Without it, the vast majority of Broadcom’s AI semiconductor opportunity could go out the window. In turn, Broadcom needs to ensure it locks in HBM supply, especially given NVIDIA's NASDAQ: NVDA massive HBM purchases.

Another potential benefit of its multi-year agreement with Samsung is that it could help the firm shield itself from HBM price volatility. Memory prices have seen dramatic upward swings, with HBM prices reportedly increasing by 20% in Q1 alone. The deal could potentially cap future increases, helping to prevent margin contraction at Broadcom.

Broadcom Follows in NVIDIA’s Memory Footsteps

Speaking of NVIDIA, the company recently announced a similar partnership. NVIDIA and SK hynix NASDAQ: SKHY entered a $500 billion deal that “allows NVIDIA to secure a stable supply of next-generation AI memory." The deal also includes a two-gigawatt data center deployment, where SK Group, SK hynix’s parent company, will use NVIDIA's Vera Rubin systems. In this sense, a significant amount of revenue may also flow NVIDIA’s way. However, the overwhelming majority of the deal is likely centered around buying HBM from SK hynix.

Broadcom is clearly not alone in feeling the need to pay up for HBM, showing that it is acting strategically to further its interests.

Broadcom Eyes Samsung’s Advanced Packaging

The second part of the deal surrounds Samsung’s foundry, where it makes non-memory chips. Here, the collaboration “focuses on Samsung’s 2-nanometer (nm) and below process technologies for Broadcom’s products, including Wireless Broadband Communications (WBC) solutions. The collaboration is expected to extend to advanced packaging technologies built on Samsung’s 2nm process, including 2.3D and 2.5D integration, to enable higher-performance and more power-efficient AI and networking silicon.”

The Wireless Broadband Communications piece does not appear AI-related. Rather, it likely refers to Broadcom’s wireless and smartphone chip business. Producing these chips with Samsung may relate to Broadcom fulfilling its $30 billion deal with Apple NASDAQ: AAPL to supply wireless chips.

However, the advanced packaging portion is AI-related. Advanced packaging is also critical to building advanced AI chips as it combines HBM with computing components. This part of the agreement suggests that Broadcom is considering using Samsung’s advanced packaging technology for its AI chips. However, the release only says that the agreement is “expected to extend” into advanced packaging, indicating that nothing is set in stone.

This is notable, considering that Taiwan Semiconductor Manufacturing NYSE: TSM has dominated the advanced packaging market. TSMC's advanced packaging is also facing significant supply shortages. In this context, it makes sense for Broadcom to explore Samsung as an alternative advanced packaging supplier. If Samsung’s advanced packaging capabilities prove to be adequate for Broadcom’s needs, the company may be able to sell more chips than it otherwise could.

Broadcom and Samsung: Do the Advanced Packaging Stars Align?

Broadcom is taking the necessary steps to execute its long-term data center opportunity. Going forward, investors may monitor whether Broadcom mentions margin benefits due to its long-term deal with Samsung. Additionally, it is worth monitoring whether Broadcom actually adopts Samsung’s advanced packaging technology and if management sees this benefiting the firm’s growth.