July 4, 2025
"In early 2025, we added Broadcom to our portfolios. Although less publicized than Nvidia, Broadcom plays a pivotal role in the AI boom. Broadcom combines steady software revenues with cutting-edge chip technologies, positioning it as a leader in AI infrastructure. Below we outline our rationale for this long-term holding."
Broadcom is a global technology giant that focuses on two core activities:
Infrastructure software (40% of revenue): Through targeted acquisitions – including Symantec and recently VMware – Broadcom has built up a strong software division. These products are deeply integrated into customers’ IT environments and deliver stable, recurring revenues. Software revenue is growing steadily by around 5% per year.
Semiconductors (60% of revenue): Broadcom develops Application Specific Integrated Circuits (ASICs), among other things, specially designed chips that “hyperscalers” such as Google, Meta and ByteDance use for AI applications. Half of semiconductor revenue now comes from these AI-related chips.
To illustrate: ASICs are designed like racing bikes for a specific course, while GPUs – such as those from Nvidia – are all-round mountain bikes. ASICs are less flexible but offer hyperscalers up to 50% lower operational costs.
The remaining semiconductors are destined for markets such as telecom, wireless communications and industrial. These segments have been in a downward cycle for years, but still have long-term growth potential
Under CEO Hock Tan (age 73), Broadcom achieved an impressive annual return averaging 40% since its 2006 IPO. Tan, holding over $400 million in Broadcom shares, excels at acquiring and optimizing low-margin B2B software companies:
VMware is a case in point. It’s operating margins increased from below 30% to around 70% in just 18 months after acquisition.
Debt financing for acquisitions is aggressive, but typically repaid within 2-3 years, creating space for future deals.
Broadcom projects the AI-ASIC market reaching $60-$90 billion by 2027, estimating its market share at 60%-80%. These figures are based on the growth plans of its current three large clients and exclude potential new clients like OpenAI. The major revenue impact from these AI investments will ramp up significantly from the second half of 2025 onward, with management forecasting continued robust growth (~60%) through 2026.
At over 35x projected 2025 earnings, Broadcom may initially appear expensive. However, sustained high growth (over 30% earnings growth), operating margins above 65%, and consistently high returns on invested capital (>20%) justify the valuation. By 2027, valuation drops to about 19x earnings, even without accounting for potential new AI clients.
Broadcom recently announced a $10 billion share buyback program (approximately 1% market cap), underscoring management’s confidence.
Recent quarterly results were strong. Meta increased its investment plans, mainly focused on its own AI chips, which are co-produced by Broadcom. Management reiterated its expected AI growth for both 2025 and 2026. CEO Hock Tan has a high credibility: he has proven over the past twenty years that he can deliver on promises.
Broadcom is successfully transforming from a cyclical business to a structurally growing powerhouse, driven by AI demand and stabilized through recurring software revenues.
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