Broadcom: Why the Chip Stock Remains a Top Long-Term AI Play

Key Points

• Broadcom's latest quarterly results showed big strengths on multiple fronts.
• The results were key to reducing AI investing worries after competitor Marvell disappointed the market.
• How did Broadcom's results compare to Marvell's, and what advantages does it have that make it a top AI stock?

Chip giant Broadcom NASDAQ: AVGO recently posted quarterly results that have many arguing that the AI party isn’t over. The market reaction to the company’s results stood in stark contrast to that of its rival, Marvell Technology NASDAQ: MRVL. Marvell released its Q4 2024 earnings on Mar. 5. Afterward, shares plummeted, losing nearly 20% of their value.

This was a bit of a shockwave that sent fears through those bullish on the AI revolution. Demonstrating the similarities in their business, Marvell’s results also dragged down Broadcom shares by 6%.

Broadcom’s earnings just one day later elicited a much more positive reaction. Shares popped over 8%, assuaging some of the concerns brought on by Marvell.

What explains these drastically different results, and why is Broadcom still a strong AI investment? This analysis will compare both companies' results and highlight key management insights.

Earnings Comparison: Broadcom Beating Expectations and Growing Its Pipeline

For Marvell, its earnings were by no means bad. The company very slightly beat estimates on revenues, adjusted earnings per share (EPS), and next quarter guidance for both figures. However, Broadcom shined in comparison. The company beat estimates on revenue and adjusted EPS by over 2% and 6%, respectively. Its revenue guidance for next quarter was $190 million higher than forecasted, a beat of over 1%. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance came in higher than expected by a similar dollar figure. It was 2% higher than forecasted.

Overall, these figures might not seem like massive beats, but they were enough to get markets excited enough to increase the company’s valuation substantially. Many strongly performing tech stocks have needed to significantly beat estimates and raise guidance to keep shares from falling. This was particularly true for Broadcom and Marvell this quarter. Markets hoped recent announcements of hyperscaler firms investing hundreds of billions in AI infrastructure would lead to significant guidance beats.

Broadcom may be the company that is capitalizing on this hope. Aside from the beat and raise, it provided interesting commentary that excited investors. Management mentioned that it is working with two new hyperscaler customers to make custom AI accelerator chips, in addition to two other hyperscalers that it previously revealed it is working with. This was a particularly encouraging sign, showing that Broadcom is continuing to grow its pipeline of deals. Marvell did not provide similar commentary. Overall, investors should view this as a strong sign for Broadcom's future.

VMware: Broadcom’s Ace Up Its Sleeve

One big advantage Broadcom has over Marvell in terms of investing in AI is its software. The company’s acquisition of VMware has been extremely successful. Broadcom has massively decreased its headcount at VMware and shifted many customers to a recurring subscription model as opposed to lifetime licenses. 

Additionally, the company is improving VMware's previous products and expanding the capabilities of VMware's key product, vSphere. vSphere is virtualization software that allows a server to split its computing resources across multiple workloads. Without virtualization software, a server would often go underutilized, as one workload would not be enough to use all of its power.

VMware has expanded this concept to the entire data center through VMware Cloud Foundation (VCF). It is also catering to large AI adopters with VMware Private AI Foundation. It adds virtualization for NVIDIA’s NASDAQ: NVDA graphics processing units (GPUs). This allows for the virtualization of AI workloads.

Overall, this provides a highly valuable product for large enterprises that want to run AI workloads in their private data centers. This is as opposed to running them on a public cloud like Microsoft NASDAQ: MSFT Azure. This private cloud method is ideal for ensuring data security. These changes have allowed Broadcom to increase VMware margins massively while impressively growing revenue. VMWare gives Broadcom two big ways to benefit from the proliferation of AI: hardware and software. For Marvell, hardware is really holding the torch.

AVGO: Still a Solid Way to Play AI

Broadcom looks poised to continue its impressive success in the AI investing landscape. The company’s strong-growing AI semiconductor and infrastructure software segments provide it with two revenue sources with significant AI tailwinds. Additionally, the company’s margins should continue to increase as software becomes a larger part of the firm’s business.