Apple Moves Ahead In AI With New Broadcom Deal
Contributor since 2014 / 51563 Followers
Summary:
- Apple and Broadcom will work on a new custom server AI chip.
- This deal should be more beneficial for Broadcom.
- Apple wants more exposure to AI, but its growth is weak and its valuation is high.
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Article Thesis
Apple (NASDAQ:AAPL) and Broadcom (NASDAQ:AVGO) announced a new AI chip cooperation this week, which is good news for Broadcom, as it should result in additional business growth opportunities, while the deal also could have positive implications for Apple, which has so far not become a major player in the fast-growing AI space. There was also some additional news about Apple’s cooperation with Amazon.com (AMZN), OpenAI, and Alphabet (GOOG)(GOOGL).
Past Coverage
I have covered both Apple and Broadcom in the past here on Seeking Alpha, with my most recent article on Apple being from this fall, where I covered Warren Buffett/Berkshire Hathaway’s Apple sales. My most recent article on Broadcom is from this summer. With news about a new cooperation between these two companies emerging, it is time for another article to cover what this means for the two tech giants.
What Happened?
On Wednesday, we got news about an Artificial Intelligence server chip deal between consumer goods tech giant Apple and semiconductor company Broadcom. Seeking Alpha reported on the deal between the two tech companies, telling us that the new chip, named Baltra, is an AI pure-play server chip and that it might be rolled out in a little more than a year, as it is scheduled for some point in 2026.
According to the information we have today, Taiwan Semiconductor Manufacturing Company (TSM) will manufacture the chip once it is ready for production, which naturally is positive for TSM as well. TSM has turned into one of the biggest AI winners in the recent past, seeing strong business growth due to working with NVIDIA and thus benefitting from the latter’s massive growth, for example. With TSM now producing this new server chip for Apple and Broadcom, it will add even more AI-related revenues in the coming years, which should boost its revenue and profits further.
According to the sources for this report, the chip will utilize TSM’s 3nm process, which isn’t surprising — Apple and Broadcom naturally want to go with an advanced process for a chip like this in order to have both performance and efficiency as high as possible.
Why This Deal Could Be Important For Apple
Apple is one of the largest companies in the world — depending on what metric one uses, it even is the largest. It has a very strong brand when it comes to techy consumer goods such as the iPhone and iPad. But unlike many other tech giants such as Microsoft (MSFT), Alphabet, and so on. Apple does not have exposure to AI leader OpenAI, unlike Microsoft, and it also has not come out with any AI tech that is, I believe, comparable to what Alphabet or Meta Platforms (META) have come up with so far. At the same time, Apple’s core business has been growing at a rather slow pace in the recent past, which is not very surprising, as the smartphone market and the PC market aren’t growth markets anymore. The company thus could benefit a lot from a growth boost from increased AI exposure and capabilities, as this could revive Apple’s business growth which has been lacking in the recent past. Better AI offerings could boost Apple’s services business and might also make its newer/future smartphones more attractive, which might result in shortened lifecycles. And if iPhone holders upgrade their phones more often, that means more revenue and more profit for Apple, all else equal. Since the company’s shares are quite expensive today — more on that later — an improved growth outlook could come in very handy for Apple, although there is, of course, no guarantee that this new AI server chip will indeed make Apple’s products and services more attractive — as with all AI ventures, there is a significant risk that a lot of money is being spent on something that ultimately does not generate attractive returns, as General Motor’s (GM) $10 billion failure with Cruise has just shown.
Why This Deal Could Be Important For Broadcom
Broadcom has a diversified business and is active across different sub-sectors of the vast semiconductor industry, so it is not overly dependent on a single product or customer in general. Still, when it comes to a company the size of Apple, even a single new product for one such customer can move the needle for a company like Broadcom when it comes to revenue generation and profits. It is also worth noting that the fact that Apple, which has massive resources and which could likely cooperate with all major semiconductor companies if it wanted to, has decided to cooperate with Broadcom when it comes to developing this new AI chip, is a major endorsement. Broadcom seemingly is a company with strong tech and solid execution in the eyes of Apple — otherwise, Apple would not have decided to pursue this project with Broadcom but would have partnered with some other semiconductor company instead.
There is no way of knowing how big this business will be for Broadcom eventually, but just as a thought example, if just 1% of Apple’s revenues were to end up in the pockets of Broadcom due to this deal that would mean $4 billion in additional annual revenue for Broadcom — which would be equal to around 10% of its current annual revenue. Looking at the much more pronounced spending on AI chips by companies such as Meta Platforms, Alphabet, and so on, that would not really be an especially aggressive estimate, although it is of course possible that the venture turns out to be a failure eventually. Still, assuming that will not be the case, it is understandable that Broadcom’s shares reacted very positively to this announcement, rising by 7% on Wednesday, whereas Apple traded almost flat on the day — Broadcom thus seems to be the winner from this agreement in the eyes of the market.
Other AI Developments For Apple
While the news about the development of this new server chip with Broadcom got most of the attention this week, there was some other Apple AI news on top of that.
First, Apple recently made positive statements about Amazon’s AI chip, with Benoit Dupin, one of Apple’s senior directors, stating that Apple might use Amazon.com’s AI chip for training some of its AI models. This is, I’d say, a positive endorsement of Amazon’s tech when it comes to AI chip development.
Second, and potentially more importantly, Apple has rolled out some additional AI features with its new iOS18.2. While none of these features seem like game-changers to me, the fact that Apple continues to add new AI features underlines that the company sees a need to expand its AI offerings, which is aligned with its wish to have its own AI server chips thanks to the new cooperation deal with Broadcom. The new AI offerings include ChatGPT integration, which could be useful for Apple’s customers here and there, but which will also be good for OpenAI and thus for Microsoft thanks to its stake in OpenAI.
Are Apple And Broadcom Attractive?
It is hard to say how big the impact of this new deal between Apple and Broadcom will be, but until we see a significant positive impact (or have clear indications that there will be one), I’d say that this new deal announcement alone does not make either of the two companies a Buy right here.
Apple has seen its growth almost stall out, with year-over-year revenue growth moving between -4% and +6% over the last four quarters. And yet, shares are trading at a massive 34x forward net profits, which does not seem justified to me, especially since higher-growth companies such as Alphabet trade at way lower valuations. The combination of sub-par growth (at least for now) and a high valuation suggests, I believe, that locking in gains could be a good idea.
Broadcom looks significantly better growth-wise, with growth coming in at +40% over the last two quarters, but growth is not expected to remain this high forever, of course. Still, analysts see a revenue growth rate of 17% next year and 13% the year after, which is an attractive business growth rate for sure. Since Broadcom is trading at 35x forward net profits today, it is valued at a pretty comparable valuation to Apple, while growing at a much faster pace. In the eyes of the market, Broadcom will also benefit more from the new deal between the two companies. With better growth and a relatively comparable valuation, I’d say Broadcom looks better than Apple here, although I wouldn’t call it a Buy at its current all-time high, either.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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