Unless You’re Nvidia, the AI Chip Business Is Complicated

FILE PHOTO: A smartphone with a displayed Broadcom logo is placed on a computer motherboard in this illustration taken March 6, 2023. REUTERS/Dado Ruvic/Illustration/File Photo (REUTERS)
FILE PHOTO: A smartphone with a displayed Broadcom logo is placed on a computer motherboard in this illustration taken March 6, 2023. REUTERS/Dado Ruvic/Illustration/File Photo (REUTERS)

Summary

Broadcom and Marvell shares have surged on AI hype, but other chip segments weigh on results.

Investors have been treating Broadcom like the next Nvidia. They forgot about the iPhone.

Broadcom’s market value has more than doubled over the past year, and its stock has been the third-biggest gainer on the PHLX Semiconductor Index in that time behind Nvidia and Advanced Micro Devices. Surging demand for systems to power generative artificial intelligence services has driven sales for Broadcom’s networking chips, which are used for things like connecting Nvidia’s popular GPU chips together in data centers to form what are effectively AI supercomputers.

That is quickly becoming a big business for Broadcom. The company told analysts during its fiscal first quarter earnings call Thursday afternoon that revenue from AI chips totaled $2.3 billion in the January-ending quarter—a 53% jump from the previous quarter. Chief Executive Officer Hock Tan also added that the company now expects AI revenue to top $10 billion in its current fiscal year, which is more than double the $4.2 billion from those products during the previous year.

But, unlike Nvidia, which is now drawing the vast majority of its overall revenue from AI processors used in data centers, Broadcom is now a well diversified tech giant spanning both the semiconductor and software markets. Most of them aren’t growing anything like AI—with some not growing at all. Broadcom’s wireless segment, which primarily supplies radio-frequency chips to Apple for the iPhone, saw revenue slip 4% year-over-year to about $2 billion.

Other parts of the company’s chip business, such as server storage and broadband connectivity, are faring even worse. Thus, Broadcom’s overall semiconductor segment grew revenue just 4% year-over-year to $7.4 billion during the most recent quarter—basically matching Wall Street’s estimates. And the company left its full-year forecast for total company revenue unchanged at $50 billion.

That splashed a bit of cold water on Broadcom’s red-hot stock, which slipped nearly 3% in after-hours trading on Thursday. Marvell Technology, another diversified chip maker with a growing AI business, reported results for the January quarter Thursday that showed a similar dynamic, with non-AI segments missing Wall Street’s projections. Marvell also issued a disappointing revenue forecast for the current quarter, noting “soft demand impacting consumer, carrier infrastructure and enterprise networking in the near term." Marvell’s shares tumbled more than 7% after hours after having more than doubled in the past 12 months.

The chip industry has broadly benefited from the notion that it is the first in line to see significant revenue from generative AI. The heavy computing horsepower required by services such as ChatGPT has forced tech giants that already own vast networks to pour billions of dollars more into the components needed to power those services. That has boosted demand for central and graphic processors, networking chips and specialized memory, while also prompting an investor stampede into the chip sector. The PHLX index surged 65% in value last year—its best annual performance since 2009—and already has jumped another 24% this year, making it the market’s best-performing tech subsector.

But, like Broadcom and Marvell, most chip companies also carry exposure to other market segments that are either mature and slow-growing or still dealing with inventory overhangs caused by over-ordering earlier in the pandemic. Even AMD has to contend with sluggish markets for PCs and videogame consoles. And Broadcom now generates 40% of its business from software, thanks to its acquisition of VMware last year. That sort of steady, recurring revenue will put the company in a better position to deal with the chip industry’s notorious cycles. 

That should come in handy—AI hype won’t last forever.

Write to Dan Gallagher at dan.gallagher@

wsj.com

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