Behind the trillion-dollar Nvidia, there is another hidden AI player in the market.

Since 2023, NVIDIA has been recognized as the biggest player in the global AI gold rush, and it is also the AI chip company with the highest level of discussion on major media and social platforms. In addition to NVIDIA, other notable players in the AI chip industry include the veteran chip design giant AMD and chip startup Cerebras, among others.

However, there is another major player in the AI chip industry that is often overlooked - Broadcom.

In the second quarter, Broadcom's chip revenue exceeded expectations mainly due to the demand for AI. In the next fiscal year, Broadcom's AI-related chip business is expected to double to $7 billion, making it the second largest AI chip company in the world, second only to NVIDIA.

Wall Street also unanimously believes that Broadcom is likely to be the biggest winner after NVIDIA in the flourishing AI infrastructure, with Bank of America analysts even rating Broadcom as the "most underestimated beneficiary of AI."

Although Broadcom's expansion in the AI chip market is currently far behind NVIDIA, with the completion of the largest acquisition in the history of the global semiconductor industry - Broadcom's acquisition of VMware - will Broadcom be able to write its own legend in the AI field?

Under the shadow of NVIDIA's halo, is Broadcom still worth looking forward to?

On Thursday, Broadcom released its latest earnings report, showing a 5% year-on-year increase in net revenue to $8.9 billion in the second quarter, slightly exceeding market expectations.

Among them, the revenue of Broadcom's core chip business increased by 5% year-on-year to $6.94 billion, also slightly exceeding market expectations. The company stated that the chip business is mainly driven by AI, otherwise the revenue of this business would be flat compared to the same period last year.

Looking ahead, Broadcom expects third-quarter revenue to increase by 4% year-on-year to $9.27 billion, slightly lower than expected. As a result, Broadcom's stock fell nearly 5% in after-hours trading on Thursday.

According to the latest earnings report, NVIDIA's second-quarter revenue (ending in July) doubled year-on-year to $13.5 billion, which is almost unprecedented among all major chip manufacturers. From a business perspective, the performance of the data center is very strong. In the second quarter, NVIDIA's data center revenue reached a record-breaking $10.32 billion, more than doubling in just one quarter.

The performance guidance for the third quarter is even more impressive. NVIDIA expects revenue to increase by 170% YoY to $16 billion in the third quarter, doubling for two consecutive quarters and surpassing analysts' expectations by 28%.

In contrast, Broadcom's performance looks mediocre, even disappointing, in the shadow of NVIDIA.

The biggest positive signal may be that Broadcom's third-quarter performance growth is still mainly supported by AI chips.

Hock Tan, President and CEO of Broadcom, said, "We expect to achieve YoY growth in the fourth quarter (third quarter), reflecting the company's continued leadership in the generative AI field."

Currently, Broadcom's major customers in the AI chip business include Google, Meta, and Microsoft.

Google's self-developed AI chip, the TPU Tensor Processor, is produced by Broadcom. According to a report released by Morgan Stanley analyst Harlan Sur at the end of May, Google's TPU orders could generate more than $3 billion in revenue for Broadcom.

In addition, Meta is also using Broadcom to manufacture its self-developed AI chips, but Meta has not yet deployed many chips.

Riding the wave of AI investment, Broadcom has risen nearly 67% year-to-date, but still lags behind NVIDIA's increase of over 240%.

Although Broadcom's performance growth rate is not as good as NVIDIA's, and its stock price has reached a high threshold, Wall Street analysts remain confident in Broadcom's AI prospects.

Broadcom previously projected that AI-related revenue for the next fiscal year would increase from $3.8 billion this year to $7.5 billion. This growth rate is enough to make Broadcom the second-largest AI chip company after NVIDIA.

Deutsche Bank analyst Ross Seymore wrote in a research report:

Overall, we still believe that Broadcom is successfully achieving a soft landing, with its cyclical resilience, long-term growth opportunities in the AI field, and the potential growth of VMware, these factors combine to create an attractive upside.

Seymour raised Broadcom's target price from $905 to $950 and maintained a buy rating.

After the second-quarter results were announced, KeyBanc analyst John Vinh raised Broadcom's target price from $940 to $1,000, while Oppenheimer analyst Rick Schafer raised Broadcom's target price from $900 to $990.

The "buy, buy, buy" that created a chip giant

The story of Broadcom began with HP's semiconductor division.

From the birth of the semiconductor industry until the 1980s and 1990s, most hardware companies achieved vertical integration with their semiconductor divisions and wafer fabs. HP was no exception.

Within HP's Test and Measurement division, there was a chip division that focused on developing RF components (such as filters) and passive components (such as resistors and capacitors).

In 1999, HP decided to divest from businesses unrelated to its enterprise servers, software, PCs, and printers.

Agilent Technologies was established as the company spun off from its semiconductor business. In 2005, the company was further acquired by a private equity consortium led by KKR and Silver Lake, and was renamed Avago Technologies.

After Hock Tan became CEO in 2006, Avago began its rapid expansion, which has continued to this day.

Hock Tan, who holds a Master's degree in Engineering from MIT and an MBA from Harvard University, started making waves in the semiconductor industry, which is predominantly populated by engineers, thanks to his dual background in technology and finance.

One of the first major moves Hock Tan made at Avago was the acquisition of the Film Bulk Acoustic Resonator (FBAR) business from Infineon in 2008 for a mere $30 million, which solidified Avago's dominant position in that field.

In the following years, Avago made several significant acquisitions, including the $400 million acquisition of leading indium phosphide (InP) optical chip company CyOptics in 2013, the $6.6 billion acquisition of storage chip company LSI in 2014, the $600 million acquisition of fiber optic switch dominator Emulex in 2015, and the acquisition of communication chip giant Broadcom for $37 billion.

In just a few years, Avago acquired several larger competitors, earning Hock Tan the reputation of being the most aggressive dealmaker in the global semiconductor industry in recent years.

It is worth mentioning that after the acquisition of Broadcom, Avago abandoned its original name and adopted Broadcom as the new company name.

It is said that Avago is far behind Broadcom in terms of overall scale, profitability, number of patents, and brand recognition. After swallowing Broadcom, Avago can leverage Broadcom's brand strength to make an even bigger splash.

In 2017, "acquisition king" Broadcom swallowed network equipment manufacturer Brocade for $5.9 billion. That same year, Broadcom set its sights on Qualcomm and Toshiba's memory business, although those attempts ultimately fell through, they revealed Broadcom's immense ambition in the semiconductor industry.

After dominating a significant portion of the semiconductor hardware landscape, Hock Tan shifted his attention to software companies. In 2018, Broadcom acquired software company CA Technologies for $19 billion, and then in 2019, it acquired the enterprise security business of information security giant Symantec for $10.7 billion.

In 2021, Broadcom was also reported to be acquiring data analytics software giant SAS Institute, but the deal ultimately fell through due to failed negotiations.

Through aggressive acquisitions of its peers, Broadcom has grown from an unknown player to a global chip giant with a market value exceeding $380 billion. However, it has not stopped its "buy, buy, buy" strategy.

In July of this year, Broadcom announced that the European Commission conditionally approved its $61 billion acquisition of cloud computing giant VMware, clearing the way for the largest semiconductor merger in history.

It is widely believed that this deal will transform Broadcom into a diversified technology giant, spanning from chips to cloud computing services.

However, the cost of this aggressive buying spree is significant. Due to continuous expansion through debt-financed acquisitions, Broadcom's leverage ratio does not appear optimistic.

Analysts believe that after completing the acquisition of VMware, Broadcom's debt leverage ratio will be 2.9 times (debt-to-adjusted EBITDA ratio for the past 12 months), slightly below the safety level.