The Wall Street Journal reported on October 7 that Broadcom is arranging more than $50 billion in financing for OpenAI. The funding would help OpenAI buy the custom AI chips the two companies are jointly developing. I believe that makes the company’s demand picture easier to trust over the long run, since the chip program runs through 2029.
Why Funding the Customer Strengthens Broadcom’s Hands
OpenAI and Broadcom aim to deploy 10 gigawatts of custom accelerators by the end of 2029. However, newer AI buyers may struggle to pay for that much hardware upfront. Broadcom’s financing plan would help address that challenge by bridging the gap between chip payments and the revenue generated from using the hardware. I think this could strengthen customer ties, since walking away becomes more complicated when financing is part of the arrangement. The uncertainty is that discussions are still in the early stages, terms could change, and the report did not identify the borrower. Even so, the deal shows how far Broadcom is willing to go to secure demand.
A Small Premium for Outsized Growth
AVGO trades at a forward P/E of 29.54x, around 8% above its most recent historical average of 27.39x. The stock’s forward price-to-sales ratio is also elevated at 15.51x, compared with a five-year average of 13.10x, a premium of roughly 18%. These premiums appear modest given that analysts expect EPS to grow 71% this fiscal year and 66% next year. If those forecasts materialize, the P/E would decline to approximately 17x on fiscal 2027 earnings. However, growth is projected to ease to 34% by fiscal 2029. Net debt of about $35 billion represents about 2% of the company’s $1.64 trillion market capitalization.
In my view, Broadcom’s valuation premium could be justified if the OpenAI financing moves forward and demand for custom chips remains strong through 2029.
Your take:
Does financing its customers make Broadcom’s demand safer or riskier?