Executive Summary
Broadcom (AVGO) is the most profitable semiconductor company outside of Nvidia. CEO Hock Tan is the best capital allocator in the industry. The thesis is two-fold: 1) AI requires massive networking bandwidth (Broadcom switches), and 2) Hyperscalers need help building custom chips (Broadcom Custom Silicon).
1. The AI Network
You can't build a supercomputer without connecting 100,000 GPUs.
- Jericho3-AI: Broadcom's switching chips are the standard for Ethernet-based AI clusters.
- Optics: As data moves faster, copper wires melt. You need silicon photonics (light). Broadcom is the leader in optical interconnects.
2. Custom Silicon (ASICs)
Google doesn't build the TPU alone. They pay Broadcom to design the hard parts (SerDes, I/O).
- The Customer List: Broadcom designs the TPU for Google, the Trainium chip for Amazon, and the Meta Training Inference Accelerator (MTIA) for Meta. If "Custom Silicon" wins, Broadcom wins.
3. VMware Software
Broadcom acquired VMware to pivot into software.
- Pricing Power: Hock Tan immediately raised prices and cut costs at VMware. This creates a massive stream of recurring cash flow to fund dividends.
Risks to the Thesis
- Customer Concentration: A huge chunk of revenue comes from Apple and Google. Losing one of them would be catastrophic.
- Debt: The VMware acquisition added leverage. High rates make this debt expensive.
Conclusion
Broadcom is the "Private Equity" firm of semis. It buys monopolies, raises prices, and returns cash to shareholders. It is the highest quality dividend growth stock in tech.