Deeply bound with OpenAI, Broadcom is accompanying Altman in a "AI gamble"

Broadcom's deep cooperation with OpenAI is a high-risk, high-reward gamble. On Monday, Wall Street Insight reported that Broadcom is set to develop a large number of chips and computing systems for OpenAI, driving its stock price up nearly 10% on the same day. This agreement is part of a series of procurement plans that OpenAI has reached with top global AI chip suppliers, including NVIDIA and AMD. According to reports, OpenAI plans to invest billions of dollars to fill data centers with hundreds of thousands of chips, with a total power consumption reaching 26 gigawatts, a figure that dwarfs New York City's peak summer electricity demand. However, this is just one-tenth of the construction plan that OpenAI CEO Sam Altman revealed to employees for the next eight years. The key question, however, remains unclear: how will OpenAI pay for this? The star startup in the AI field is expected to generate about $13 billion in revenue this year, which, while considerable, is far from sufficient to support the massive expenditures Altman has outlined. The company has informed investors that it does not expect to turn a profit until 2029. For Broadcom, this means it is betting significant resources on a client full of uncertainties. Potential Returns and Risks Behind the Gamble For Broadcom, the partnership with OpenAI paints a picture of enormous business prospects, but it also comes with equivalent risks. Bernstein Research analyst Stacy Rasgon estimated on Monday that the deal is expected to bring Broadcom "well over $100 billion" in additional revenue over the next three to four years. The narrative logic of OpenAI is that artificial intelligence will achieve exponential growth, and competitors who hesitate due to fear of risk will ultimately be eliminated in the future. Altman has discussed funding his ambitions through new financing tools, which increasingly rely on massive debt. But for Broadcom, this is essentially a huge bet on a high-risk client. There are reasons to doubt whether Altman's grand goals can ultimately be realized. If OpenAI's growth fails to meet expectations, Broadcom will face direct impacts. Compared to NVIDIA or AMD, Broadcom's investment in this gamble is even greater, as the customized nature of its collaboration entails higher costs. More critically, if OpenAI's business encounters difficulties, the systems developed specifically for it will be hard to transfer to other clients. Broadcom CEO Hock Tan recently admitted in discussions with analyst Stacy Rasgon that while developing large AI systems will boost the company's profits, it will also dilute its gross margins, although he did not disclose specific figures. In this sense, Broadcom's bet on OpenAI is even larger than that of NVIDIA or AMD. Intensifying Competition and Valuation Challenges Despite the seemingly glamorous partnership with OpenAI, Broadcom is facing increasingly fierce competition in its custom chip business, and its high valuation has left some market participants puzzled. Nvidia and AMD are still actively vying for OpenAI's orders, which could trigger a price war, further squeezing Broadcom's profit margins. A warning signal is that Google's core customer for Broadcom's custom chip business has begun collaborating with MediaTek from Taiwan to develop custom AI chips. Broadcom's stock price is currently about 40 times its expected earnings for next year. To some extent, this is due to CEO Hock Tan's outstanding track record in enhancing efficiency and extracting profits, transforming Broadcom into a comprehensive enterprise with sustained profit growth and an overall gross margin exceeding 70%. However, it is difficult to explain why Broadcom's forward P/E ratio has remained higher than Nvidia's for most of this year. The latter is the clear market leader in the AI chip sector and has a broader customer base. Analysts believe that the tie-up with OpenAI may lay the foundation for Broadcom's sales growth in the coming years, but given that OpenAI's grand vision still lacks a clear financial model to support it, investors should not view it as a guaranteed profitable deal