The explosion of AI-powered data centers and technologies has provided Broadcom (AVGO, Financial) with a potent growth catalyst. This is illustrated by its beat-and-raise Q2 earnings report on June 12, and that momentum is showing no signs of slowing. The semiconductor and infrastructure software company is developing new advanced AI chips for China's ByteDance, the parent company of TikTok, as the social media company looks to bolster its supply of chips to support its AI expansion aspirations.
- Previously, ByteDance sourced most of its chips from NVIDIA (NVDA, Financial). However, due to U.S. government restrictions on sales of advanced NVDA chips to the Chinese market, ByteDance had to find another supplier.
- ByteDance is already a significant customer of AVGO, mainly purchasing networking and server components. AVGO is a natural fit to fill that void. The new 5 nm chip being designed by AVGO, and potentially manufactured by Taiwan Semi Manufacturing (TSM, Financial), would not be subject to current U.S. restrictions and sanctions.
- A deal has not been officially hammered out, and actual manufacturing of the chip hasn't commenced yet. This might not happen until next year, although AVGO could begin securing orders well ahead of the manufacturing timeline.
A new win with ByteDance would add even more fuel to the fire for an AI business that's already red-hot for AVGO.
- In Q2, AVGO's networking end market generated robust revenue growth of 44%, driven by increasing investments from hyperscaler customers as they stockpile AI accelerators. AI products accounted for approximately 25% of AVGO's total sales, up from 19% in Q1. Revenue from AI products reached a record $3.1 billion during the quarter.
- This surge in AI demand, coupled with strength in AVGO's Infrastructure Software segment, which continues to benefit from last year's acquisition of VMware, is offsetting weaknesses in other business areas such as wireless, server storage connectivity, and broadband. The company's revenue diversification strategy is paying dividends as it becomes less reliant on the highly seasonal and competitive handset market.
The main takeaway is that this potential design win with ByteDance could translate into the next meaningful growth catalyst for AVGO's burgeoning AI business.
