Broadcom slips, Truist skeptical of Google ditching chip supplier

Shares of Broadcom (AVGO) are under pressure on Thursday following a new report saying that Google (GOOGL) has “extensively” discussed ditching the company as an AI chip suppler as early as 2027. Commenting on the news, Truist said that while possible, the move was “not likely.” Meanwhile, a spokesperson for Google has said that the company sees “no change” in engagement with Broadcom.

AI CHIP SUPPLIER: Executives at Google have “extensively” discussed ditching Broadcom as an AI chip supplier as early as 2027, The Information’s Wayne Ma, Anissa Gardizy, and Jon Victor report. According to a person with direct knowledge of the matter, Google would fully design the tensor processing units in-house, potentially helping Google save billions of dollars in costs annually. Google executives set a goal earlier this year to drop Broadcom following a monthslong standoff between the companies over the price Broadcom was charging for the TPU chips, the person says.

Meanwhile, a spokesperson for Google has told Reuters that the company sees “no change” in engagement with Broadcom.

‘NOT LIKELY’: Truist views The Information’s report as “possible, but not likely.” The firm estimates the potential design loss relates to 55% of Broadcom’s AI-related revenue, 11% of total revenue, and 8% of earnings. While it is possible that Alphabet could bring this development internal, that is unlikely, the firm told investors in a research note. Truist sees this as “likely sabre-rattling over pricing,” and notes Broadcom delivers significant intellectual property and know-how. It keeps a Buy rating on the shares with a $995 price target.

LOSS WOULD ‘DAMPEN’ AI SENTIMENT: Also commenting on the news, Wells Fargo noted Broadcom shares are trading sharply lower on the report by The Information. Such a move by Google “would certainly dampen AI sentiment surrounding Broadcom,” the firm told investors in a research note. Wells says losing the tensor processing units design would be a multi-billion-dollar annual impact to Broadcom. The firm notes Broadcom’s Custom Silicon business, which includes the TPU, YouTube video encoding chips, Meta‘s (META) MTIA, and more has been one of the fastest-growing segments of Broadcom’s business.

Custom AI silicon will be a major beneficiary of Gen AI demand. Broadcom noted that it expects AI-related semi revenue to grow by ~50% quarter-over-quarter and by 2-times year-over-year in Q4 and that last quarter Gen AI represented ~15% of semi revenue, the firm says. Broadcom has noted that it expects AI silicon to grow to over 25% of semi revenue in fiscal 2024, also noting that visibility beyond 2024 remains somewhat limited. The firm keeps an Equal Weight rating on Broadcom shares with a $900 price target.

PRICE TARGET: In Thursday afternoon trading, shares of Broadcom are down about 1% to $821.24, putting the stock well off its earlier session lows.