The Giant at the Intersection of AI, Networking and Software

Broadcom isn’t just another chipmaker riding the semiconductor cycle, it’s a carefully assembled portfolio of some of the stickiest, most profitable businesses in tech.

At its core, Broadcom has mastered the art of acquisition, folding niche leaders into its empire, stripping out inefficiencies, and using the resulting free cash flow to fuel dividends, R&D, and the next deal.

This isn’t luck. Since Hock Tan took the helm, Broadcom has transformed from a mid-tier chip supplier into a global force with a presence in both cutting-edge semiconductors and enterprise software. The combination gives it diversification few tech peers can match and operating margins that most industrial giants would envy.

Key Points

• Broadcom dominates high-speed networking and custom AI chips, targeting two-thirds of a  potential $90B market within 2 years.

• VMware’s deep enterprise ties drive sticky, cross-sell-driven software revenue.

• 40%+ FCF margins could reach $50B annually, funding debt reduction, dividend growth, and strategic acquisitions.

Networking Chips Are The Moat Inside the Moat

Broadcom’s networking division might be the most under-appreciated crown jewel in its portfolio.

In merchant silicon for switching and routing, Broadcom is the undisputed leader. The company’s Tomahawk and Trident families have become the de facto standard for high-speed networking, critical for data centers that handle AI workloads.

Broadcom’s custom AI accelerator business is positioning it as a direct beneficiary of hyperscalers’ desire to reduce dependency on Nvidia.

Google’s TPU program, for example, relies on Broadcom for key design and integration work, and other cloud providers are following suit. As AI models grow in size, the networking fabric becomes just as important as the GPU horsepower, and Broadcom sits at the crossroads of both.

The cost to design one of these high-end chips can run $50 million to $100 million, chump change for Broadcom, but a serious barrier for upstarts. That’s part of why it can sustain dominance in switching and routing, even as newer fields like optical transceivers and data processing units get more competitive.

The Advantage Apple Can’t Shake

In wireless, Broadcom’s edge comes from FBAR filters, tiny components that block unwanted frequencies while sipping power.

If you’ve used an iPhone in the last decade, you’ve probably relied on one of these without knowing it. FBAR filters are especially valuable in the 5G era, where they help phones handle higher frequencies without draining the battery.

FBAR manufacturing isn’t something you can just spin up in a new fab. It requires expertise in non-silicon materials like aluminum nitride and decades of process refinement. Broadcom has kept its FBAR production in-house specifically to guard these trade secrets. That’s why, even if Apple eventually replaces Broadcom’s Wi-Fi and Bluetooth chips, its reliance on FBAR tech is likely to remain.

Industry estimates peg Broadcom’s silicon content in each iPhone at roughly $20, about double Skyworks’ and four times Qorvo’s. This gives Broadcom a premium per-device revenue stream that is hard to replicate.

VMware and the Software Playbook

Broadcom’s acquisition of VMware in 2023 marked a shift from niche software bolt-ons to a full-scale platform play.

VMware’s virtualization software is a backbone technology for thousands of enterprises, sitting deep in their infrastructure. Replacing it isn’t just a technical challenge, it’s a multi-year operational headache that few CIOs want to take on.

Broadcom’s focus is on large, high-value customers, banks, governments, Fortune 500s, and to sell them more of what they already use.

According to management, more than 80% of these customers already deploy five or more Broadcom software solutions. That level of integration makes churn almost unthinkable.

The cross-sell opportunity between VMware’s installed base and Broadcom’s security, DevOps, and mainframe tools could quietly become one of the company’s most durable growth levers over the next decade.

The New Growth Engine

Broadcom’s AI-related revenue is already one of its fastest-growing segments, and it’s not just about GPUs. Hyperscalers are pouring billions into AI infrastructure, and Broadcom supplies the networking and custom silicon that make those systems scale.

Management pegs its AI chip market opportunity at as much as $90 billion by 2027, and Broadcom believes it can win two-thirds of that.

Our modeling suggests its AI chip sales could grow at a 40%-plus compound rate through 2029, with demand increasingly spread across multiple cloud providers, reducing concentration risk.

Risks Investors Tend to Overlook

Broadcom’s dependence on a few big customers in wireless and AI, Apple, Google, and others, means revenue concentration is a real risk. A spending slowdown from just one could ripple through results.

There’s also key man risk. CEO Hock Tan, now in his seventies, has been the architect of Broadcom’s acquisition-led strategy. A leadership change could test whether the company’s efficiency machine is cultural, or just Tan’s unique touch.

Finally, while AI growth looks unstoppable today, the industry has a history of cyclical investment patterns. Broadcom’s diversified base may soften the blow, but it won’t eliminate it.

Why Broadcom’s Moat Could Last Decades

In chips, Broadcom’s moat comes from decades of engineering depth, customer integration, and the capital intensity of keeping up. In software, it’s the steep switching costs and entrenchment in the world’s largest enterprises.

It’s rare to find a company that could reasonably keep earning outsized profits for the next 20 years, but Broadcom might be one of them. If AI spending persists and VMware’s cross-selling potential is realized, the next leg of Broadcom’s story could make its past look modest.