Complex data center workloads such as training machine learning models and running artificial intelligence (AI) applications can take a very long time if they are run solely by central processing units (CPUs). To this end, specialized semiconductors are being used to accelerate computationally intensive AI tasks.
In that vertical semiconductor, Nvidia(Nasdaq: NVDA) Graphics processing units (GPUs) have emerged as the industry standard. In fact, the company has between 80% and 95% of the market share in AI accelerators, according to analysts. But Nvidia shareholders recently got some troubling news from the competitor Broadcom(NASDAQ:AFGO).
Broadcom sells a range of semiconductor products, including embedded Wi-Fi and Bluetooth chips apple and Samsung Smartphones, in addition to networking chips Arista Keys. But Wall Street is particularly impressed by its leadership in application-specific integrated circuits (ASICs). ASICs are chips designed specifically for specific use cases such as acceleration artificial intelligence (Artificial Intelligence) Workloads.
Analysts estimate that Broadcom has nearly 60% market share in custom AI chips due to its relationships with three superscalers, a term that refers to companies with extensive data center footprints. Although Broadcom does not identify its large-scale customers, analysts generally believe they are Google’s parent company alphabet, Meta platformsAnd TikTok’s parent ByteDance.
Broadcom estimates that revenue from its three current large-scale customers will range from $60 billion to $90 billion in 2027, up from $12.2 billion in 2024. In other words, the company expects sales of custom AI chips to increase by 70% over lowest annually in the next three months. years, but perhaps as quickly as 95% per year.
This is disappointing for Nvidia shareholders because it means Broadcom is likely to gain market share in AI accelerators. In fact, analysts at Morgan Stanley They estimate that ASICs will account for 13% of AI accelerator sales in 2027, up from 11% in 2024. They also believe that number could reach 15% in 2030. But there’s more bad news for Nvidia shareholders.
Broadcom CEO Hock Tan told analysts on a fourth-quarter earnings call that Broadcom has picked up two new hyperscalers that are likely to be revenue-generating customers by 2027. This means revenue from custom AI chips could actually grow Faster than 95% annually next year. A few years. Importantly, although Broadcom did not identify the customers, analysts believe they are the creators of Apple and ChatGPT OpenAI.
Image source: Getty Images.
Reported that Broadcom Selected Two additional hyperscalers as potential customers. CEO Hock Tan himself used this word because Broadcom will not develop ASICs for small companies, nor will small companies be interested in using custom AI chips.
There are two reasons for this. First, ASIC chips are expensive to design, so a customer must have a large enough data center footprint to justify the cost. Piper Sandler Each chip costs about $500 million to design, so it wouldn’t make financial sense to work with customers who can only order a few thousand, analyst Harsh Kumar told CNBC recently. Instead, orders must be between 250,000 and 500,000 units.
Second, custom chips are less flexible because they are designed for specific workloads and lack supporting software development tools. Nvidia offers a powerful ecosystem of code libraries and pre-trained models that simplify GPU application development. There are no such tools for ASICs. This means that deploying custom chips requires a high degree of technical expertise, which means Broadcom’s customer base is limited.
In addition, companies experimenting with ASICs may ultimately decide that the costs outweigh the benefits. Antoine Chakiban of New Street Research says that only two companies have deployed AI silicon at scale: Google and Amazon. So Nvidia is well positioned to maintain its leadership in AI accelerators. Bank of America Analysts estimate that it will hold 75% of the market share in 2030, down only slightly from 80% in 2024.
Looking ahead, Wall Street believes Nvidia’s adjusted earnings will increase 34% annually through fiscal year 2027, which ends in January 2027. This consensus makes the current valuation of 53 times adjusted earnings seem very reasonable. Prospective investors can buy a few shares with confidence, and existing shareholders have good reason to be optimistic going forward.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Susan Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Bank of America is an advertising partner of Motley Fool Money. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Trevor Genuine He has positions at Amazon, Arista Networks, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Arista Networks, Bank of America, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has Disclosure policy.
