Why Broadcom Stock Surged This Week
Key Points
Broadcom has partnered with OpenAI to deploy 10 gigawatts of custom artificial intelligence (AI) accelerators.
The deal could generate a tremendous amount of new revenue for Broadcom, but there are risks that should be considered.
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Shares of Broadcom (NASDAQ: AVGO) were up this week following a deal between the semiconductor giant and OpenAI to deploy a large quantity of custom artificial intelligence (AI) accelerators over a multiyear time frame. As of early Thursday afternoon, Broadcom stock was up about 8.6% for the week, according to data provided by S&P Global Market Intelligence.
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A 10-gigawatt AI deal with OpenAI
On Monday, Broadcom and OpenAI announced a partnership that will see OpenAI design custom AI accelerators that will be developed and deployed in conjunction with Broadcom. Connectivity between server racks will be handled by Ethernet and other connectivity solutions from Broadcom.
Over multiple years, the plan is to deploy AI accelerators that will consume 10 gigawatts of power in aggregate. This deal rivals other recent deals that OpenAI has made with Nvidia and AMD for GPUs. Broadcom didn't disclose the revenue impact from this deal, but one analyst estimated that it could generate up to $100 billion in additional revenue for Broadcom over the next four years.
Investors should understand the risks
While the megadeal with OpenAI is a huge win for Broadcom, the company is taking a meaningful risk by partnering with the AI start-up. OpenAI has struck multiple megadeals in recent months for AI infrastructure, but as of today, it doesn't have the cash or the revenue to pay for them.
OpenAI is going to need to raise an unprecedented amount of capital to fund its ambitions. If it fails to do so, or if the AI boom fizzles out, Broadcom could be left holding the bag.
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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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