BMO is bullish on Broadcom Inc. (AVGO.US) as AI custom chips and network interconnects build a competitive moat.

BMO Capital Markets has begun coverage of Broadcom Inc. (AVGO.US), giving it an "Outperform" rating with a target price of $455. BMO analyst Harsh Kumar stated that Broadcom Inc. is a leading AI supplier in custom ASIC (XPU) and networking, and the second-largest AI chip company in the world, behind NVIDIA Corporation. Application-specific integrated circuits (ASICs) are chips designed for specific tasks. Companies like Alphabet Inc. Class C, OpenAI, and Anthropic use these custom chips to run their AI systems, rather than solely relying on NVIDIA Corporation's general-purpose processors. In the analyst's view, Broadcom Inc. possesses two core capabilities in AI data centers that are difficult to replace: first, the company designs custom chips for large tech firms, a practice that has been ongoing for over a decade; second, it manufactures network components that enable thousands of chips to transmit data at high speeds. Without fast data transfer between chips, the value of large AI clusters would significantly decrease, and Broadcom Inc. is a key supplier in this critical area. For these reasons, Kumar believes that demand for Broadcom Inc. products will remain strong over the next two years. Broadcom Inc. collaborates with nearly all major cloud service providers and AI labs developing their own chips. The management of Broadcom Inc. expects that its AI chip revenue will exceed $100 billion by fiscal year 2027. This rating comes at a time when Broadcom Inc. is experiencing a flurry of news. Reports indicate that Broadcom Inc. is negotiating a debt financing deal to raise over $60 billion to provide AI chip financing for clients such as Anthropic. Blackstone and Apollo may participate, with the final financing amount potentially reaching $100 billion. The market has long been concerned that large clients like Alphabet Inc. Class C might develop their own chips, thus reducing their reliance on Broadcom Inc. BMO's report counters this pessimistic view. The continued growth in spending and capacity targets by Alphabet Inc. Class C has actually increased short-term demand for Broadcom Inc. systems. However, competitive risks remain. Marvell Technology, Inc. (MRVL.US) recently announced an expansion of its custom chip collaboration with Alphabet Inc. Class C, indicating that Broadcom Inc. faces real competition in this field. Notably, Broadcom Inc. will release its third-quarter earnings report on September 2. As a leading global semiconductor supplier, Broadcom Inc.'s performance in the AI chip sector is under close scrutiny from investors. The company's revenue in the second fiscal quarter surpassed $22 billion, a year-on-year increase of approximately 48%. Overall, Wall Street analysts are optimistic about Broadcom Inc., with a consensus rating of "Strong Buy" and an average target price of $509.96, representing a 43% increase from current levels.