Broadcom's AI Chip Growth with OpenAI Faces VMware and Valuation Risks

Feb 2, 2026, 2:19 AM

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Broadcom (NasdaqGS:AVGO) has recently made headlines by securing a multi-year supply agreement to provide custom AI chips to OpenAI. This partnership positions Broadcom as a key player in the rapidly expanding market for AI infrastructure, alongside major cloud providers like Google. The company's focus on custom AI silicon has led to a remarkable growth in AI semiconductor revenue, which reached $12.2 billion for fiscal year 2024, marking a staggering 220% increase year-on-year.

Despite this impressive performance, Broadcom is grappling with significant challenges, particularly related to customer churn from VMware, which the company recently acquired. Changes in VMware’s subscription model have led to customer dissatisfaction, creating a precarious environment for Broadcom as it strives to maintain its growth trajectory in the AI sector.

Broadcom's stock, currently trading around $331.30 per share, is also under scrutiny due to its high valuation. Analysts note that the stock is trading approximately 15.3% above its estimated fair value, raising concerns about the sustainability of its current price level amid potential market volatility.

Risks and Opportunities in AI Growth

The surge in AI revenue has been driven by strong demand for Broadcom's AI XPUs and Ethernet networking products. The company anticipates that AI-related revenue could reach $19.9 billion by 2025, constituting 31% of total sales. This growth is underpinned by two significant trends: the shift from compute-intensive training to more frequent inference workloads, and Broadcom's strategic role in providing custom silicon and networking infrastructure.

However, Broadcom's valuation, with a price-to-earnings (P/E) ratio soaring to 97 times, makes it particularly vulnerable to market fluctuations and performance misses. The upcoming fourth-quarter earnings report will be crucial, as the company aims to exceed its revenue guidance of $17.4 billion. Falling short of this target could lead to sharp declines in stock price due to investor concerns over market saturation or execution delays.

Moreover, Broadcom faces external risks from geopolitical tensions and regulatory constraints, especially regarding trade restrictions with China. These factors could disrupt demand for AI chips and complicate supply chains, potentially hampering Broadcom's growth in a highly competitive landscape.

Competitive Landscape and Strategic Positioning

The competition in the AI chip market is intensifying, with emerging players and existing tech giants like NVIDIA vying for dominance. NVIDIA has established a vertically integrated platform that includes GPUs and a robust software ecosystem, while Broadcom has carved out a niche in connectivity and custom silicon.

Broadcom's strategy focuses on durable franchises and establishing technology leadership. Its partnerships with major hyperscalers and the recent deal with OpenAI indicate a commitment to long-term growth in AI infrastructure. However, the company must navigate the challenges posed by competitors developing in-house chips and the potential impacts of customer churn from VMware.

In summary, while Broadcom's growth in the AI sector presents exciting opportunities, it must also contend with significant valuation pressures and operational risks. The company's performance over the next few quarters will be pivotal in determining whether it can sustain its impressive revenue growth while effectively managing these challenges. Investors will be closely watching how Broadcom balances its ambitious AI initiatives with the realities of market dynamics and customer retention.

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