When people talk about generative AI, OpenAI comes to mind. The rise of OpenAI has made the world's major technology giants set foot in the field of AIGC and large models. This trend has not only driven Nvidia (NVDA.).US) market capitalization increased by 23469%, which also makes its competitor AMD (AMD.)US) achieved a market cap of 11484% growth.
In fact, there is another AIGC concept stock that has more than doubled this yearBroadcom (**go..)us）Since the beginning of the year, its stock price has accumulated **10571%, with a market capitalization of $528.8 billion (about 3.).77 trillion yuan). This means that Broadcom's market capitalization has increased by $271.7 billion (about 1.) this year94 trillion yuan). After announcing its fiscal year 2023 results and successfully completing the acquisition of VMware, Broadcom's market capitalization has reached new highs, as shown in the chart below.
Finet believes that Broadcom's stock price trend has been strong this year, mainly driven by the following two factors:
1.With the deployment of AIGC by big technology companies, Broadcom's semiconductor business revenue has achieved strong growth, and looking ahead, the revenue contributed by AI will further increase.
2.Broadcom's successful acquisition of Weirui further expanded its infrastructure software business, adding a lot of points to the stock price and performance expectations.
Broadcom's Expansion History: Acquisition of Mad Demons
Broadcom successfully completed a $61 billion acquisition of Weirui last month, making it the second-largest acquisition in the world this year, after Microsoft (MSFT.).US) for $69 billion in its acquisition of Activision Blizzard.
For Broadcom, which started with acquisitions and continues to expand and adjust its business through mergers and acquisitions, the acquisition of Weirui is not uncommon and can be said to be a routine operation.
In terms of large deals, Broadcom tried to acquire Qualcomm Inc. (qcom.) in 2017 in a cash-plus** mannerUS), at a total cost of up to $130 billion. However, the deal was rejected by the United States in early 2018 on security grounds and therefore could not be completed. This is much larger than the acquisition of Weirui.
Looking back on the development process of Broadcom, Finet found that it has always maintained its love for "buying, buying, buying". In the long process of acquisition, Broadcom's main business, development model and identity have changed.
The current "Broadcom" is not the "Broadcom" before February 2016, but the combination of "Broadcom" and **ago, which has a dazzling capital operation behind it.
In 1991, the former "Broadcom" was co-founded by an engineering professor and his students at the University of California, Los Angeles Distribution, mainly developing broadband communication chips for TV set-top boxes, which were launched in the United States in 1998.
*In terms of the predecessor of AGO, Hewlett-Packard (HPUS) underwent a strategic restructuring in 1999 and announced the spin-off of its Measurement & Computing and Imaging businesses. By June 2000, the measurement business Agilent Technologies (A. AUS) is independently listed on the New York Stock Exchange, mainly engaged in the research and development, production, sales and technical services of products in the two fields of communications and life sciences.
In 2005, private equity firms KKR and Silver Lake won 26Acquired Agilent's semiconductor products business for $600 million and established **ago technologies, the world's largest privately held independent semiconductor company at the time.
In 2009, **ago went public in the United States, mainly engaged in the design and development of semiconductors for optical fiber networks and wireless communication networks. In 2014, **ago acquired LSI for $6.6 billion, which manufactures storage system components, including dual data rate memory, read channels on a single chip, RAID controllers, custom ASICs, hardware controllers, and more.
The turning point was in 2016, when the merged Broadcom completely let go of itself and continued to "buy, buy, buy".
On February 1, 2016, the former "Broadcom" merged with **ago, **ago became the surviving company after the merger, but changed its name to Broadcom, the total consideration of this merger was $35.7 billion, and at the same time as the merger, the merged entity also ** some non-core Broadcom businesses, raising a total cash of 3$800 million.
In 2017, Broadcom, which attempted to acquire Qualcomm, turned around and acquired Brocade, a leading provider of networking hardware, software and services, including FC SAN products and Internet Protocol Networking (IP Networking) solutions, with the goal of strengthening its position as a leading provider of enterprise storage connectivity solutions, expanding its enterprise storage portfolio, and further meeting the evolving needs of its OEM customers.
To facilitate the acquisition, Broadcom partially financed the acquisition through the issuance of 2017 senior notes. The total cost is 60$3.8 billion, net of Brocade cash12$500 million at a net consideration of $47.7$8.8 billion. Following the merger of Brocade, on December 1, 2017, Broadcom** acquired Brocade's IP networking business for $800 million.
On November 5, 2018, Broadcom completed the acquisition of CA, a leading provider of information technology (IT) management software and solutions, to enhance its infrastructure software business capabilities. Similarly, in order to accelerate the acquisition, Broadcom did not hesitate to spend tens of billions of dollars.
On November 4, 2019, Broadcom completed its $10.7 billion cash acquisition of Symantec Business, a leading cybersecurity company, primarily through loans.
On May 26, 2022, Broadcom entered into an agreement and merger plan to acquire VMware (VMware) on a cash-plus** basis for a total consideration of approximately $61 billion (based on the closing price of Broadcom's common stock on May 25, 2022), second only to Microsoft's $69 billion acquisition of Activision Blizzard.
Under the terms of the merger, existing shareholders will have an option to receive 142. for every share of VMware common stock they hold$50 cash (excluding interest), or 02,520 shares of Broadcom common stock. Broadcom announced on November 22, 2023 that it has completed the acquisition of Weirui, and Weirui has also been delisted from the New York Stock Exchange.
Veritis is a multi-cloud services company with a leader in virtualization and cloud computing infrastructure. Broadcom's acquisition of Veritage is intended to strengthen its infrastructure software business. Shortly after the completion of this acquisition, on December 11, Veritex announced that it would stop selling perpetual licenses and change its solution to a subscription model.
Broadcom's fundamentals: semiconductors and infrastructure software
Broadcom designs, develops, and develops a range of semiconductor, enterprise software and security solutions. Its product portfolio includes cloud, data center, networking, broadband, wireless technology, storage, industrial and enterprise software, and more. Solutions include service contracting and enterprise networking and storage, mobile device and broadband connectivity, mainframe, network security, and private and hybrid cloud architectures.
Its revenue is generated primarily from two business segments: Semiconductors and Infrastructure Software
Today, in the semiconductor field, Broadcom provides semiconductor solutions for data management and transfer for data centers, service contractors, enterprises, and embedded network applicationsOffering a wide range of radio frequency (RF) semiconductor devices, wireless connectivity solutions, custom touch controllers, and inductive charging solutions;Semiconductor solutions are also available to support set-top box and broadband access applications, as well as enable the secure movement of digital data between hosts (e.g., servers, PCs, and storage systems) and underlying storage devices (e.g., hard disk drives ("HDDs") and solid-state drives ("SSDs").
In the infrastructure software segment, Broadcom provides customers with infrastructure software solutions that enable them to build, run, manage, connect, and secure applications at scale in diverse and distributed environments. Its hosting software business provides DevOps, AIOPS, security, and data management system solutions. Distributed software solutions enable multinational companies to optimize the planning, development, and delivery of software. Broadcom acquired Symantec's institutional business in 2019 to provide security for enterprises and institutions.
It is worth noting that with the rapid development of cloud computing, artificial intelligence and machine learning Xi rely on massive amounts of data, and the demand for data security is also increasing, and Symantec's security business is just able to meet this demand.
In terms of sales model, Broadcom mainly sells through direct sales and a network of distributors and channel partners, of which distributors and OEMs account for a large part of Broadcom's semiconductor sales, including Apple (AAPL.).US) accounted for about 20% of its revenue.
On the production side, Broadcom outsources most of its production activities, so its gross margin is also high, with an overall gross margin of 68 for the fiscal year ending October 202393%。R&D expenses are Broadcom's main expense, accounting for about 15% of its total revenue.
What to watch: The impact of the Weirui acquisition on Broadcom
Broadcom's fiscal year 2023 deadline is October 29, 2023, so Veriz, which was acquired on November 22, will be consolidated into its fiscal year 2024 results ending at the end of October 2024, and only results after November 22 (roughly equivalent to 11 months).
Prior to the addition of Veriz, Broadcom's infrastructure software business only included contributions from CA, Symantec and Brocade, as shown in the chart below, which is a small proportion of revenue compared to the semiconductor business.
With the acquisition of Brocade in 2017, CA in 2018, Symantec in 2019, and Veritage in fiscal 2023, Broadcom is strengthening its infrastructure software business.
Finet noticed thatWith operating margins typically more than 10 percentage points higher than those in the semiconductor segment and easier for the software business to build long-term, sustainable relationships with customers, it's not hard to understand why Broadcom went to such great lengths to make acquisitions.
Finet compared the performance data of Broadcom's infrastructure software business segment with Weirui for the two fiscal quarters ended late July (or early August) 2023, and found that Weirui's operating margin is lower than that of Broadcom's infrastructure software business, mainly because Weirui needs to invest a lot of R&D and marketing expenses, and perhaps Broadcom's current R&D and business advantages can bring support to Weirui. On the other hand, the revenue scale of Veritis is much higher than Broadcom's current infrastructure software business segment.
Judging from the results of Weirui for the six months ended August 4, 2023, its half-year revenue was 66$8.5 billion, gross profit of 5.4 billion0.2 billion US dollars, with a gross profit margin of 8081%；R&D expenditure was 16$8.2 billion, or 25 percent of revenue16%；Sales and marketing expenses were 22$0.5 billion, or 3.2 billion of total revenue98%。Operating profit was 8$5.5 billion with an operating margin of 12.5 billion79% and a net profit of 70.1 billion US dollars, with a net profit margin of 1049%。
This compares to revenue of 38600 million US dollars, which is only equivalent to 57 of Weirui74%。It is foreseeable that after the merger of Weirui's performance, Broadcom's infrastructure software business revenue will increase significantly.
Broadcom's fiscal year 2024 results mention this. Broadcom's software business only included CA, Symantec and Brocade in the 2023 fiscal year ended October 2023, and recorded revenue of 76US$3.7 billion, a slight increase of 341%。
Management expects revenue from its existing software business to grow from US$7.6 billion to US$8 billion next year, up 4% year-on-year. But thanks to the addition of Verric, which has leading technology, not only computing power, but also the ability to virtualize entire data centers to create a local private cloudManagement expects Weirui to contribute $12 billion in revenue in fiscal 2024 (11-month contribution), so it expects its overall software business revenue to reach $20 billion.
That is to say,As a result of the addition of Veritex and the slight growth of the existing business, Broadcom's software business revenue may grow by 163% by fiscal 2024.
In addition, the company expects to generate $1 billion in expenses for the merger of the Veriz business. Finet expects that after the merger of Weirui, with the expansion of revenue scale and the emergence of synergies after the integration, the revenue and profit of Broadcom's software business are expected to increase significantly.
Variables: With the support of AI concepts, network services are undergoing transformation
Historically, the semiconductor business has been Broadcom's main revenue**, and the merger of Veritex may allow its software business to compete with the semiconductor business.
In fiscal year 2023, Broadcom's semiconductor business revenue was 281$8.2 billion, or 78.8 percent of total revenue68%。Notably, the business unit's network revenue in the fourth quarter was $3.1 billion, up 23% year-on-year, accounting for 42% of its total semiconductor revenue, driven by strong demand from hyperscalers for its customized AI accelerators, as well as strong demand for its network switches, routers, and network cards (NICs, network interface cards) that are specifically designed to scale AI data centers. In addition, the deployment of Ethernet in their AI networks by hyperscalers is also a major thrust.
In fiscal 2023, network revenue increased 21% year-over-year to $10.8 billion. If AI accelerators are not included, the revenue from network connectivity is about $8 billion. Management expects networking revenue to grow 30% year-on-year in FY2024, driven by the acceleration of network connectivity driven by the accelerated deployment of AI accelerators by mega enterprises.
It is worth noting that generative AI accounted for 15% of Broadcom's total semiconductor business revenue in fiscal 2023, and looking ahead to fiscal 2024, Broadcom expects semiconductor solutions business revenue to grow by 5% to 10%, while revenue from generative AI will account for 25% of its total semiconductor revenue, more than offset the impact of flat or declining non-AI semiconductor revenue.
Conclusion
As demand for generative AI continues to grow, the acquisition ensures that Broadcom's semiconductor business will continue to grow during the industry downturn. In addition, its infrastructure software business division is also embracing the AI era.
Specifically, Broadcom announced on November 30, 2023 the launch of a new on-chip neural network inference engine called NetGNT (Network Universal Neural Network Traffic Analyzer) in its new software-programmable Trident 5-x12 chip.
netgnt works in parallel to augment the standard packet processing pipeline. A standard pipeline is a packet path, which means it looks at a packet as it passes through a specific path of the chip port and buffer. In contrast, Netgnt is a machine-learning Xi inference engine that can be trained to look for different types of traffic patterns across the entire chip. For example, NetGNT can look for a traffic pattern called "Incast" (many-to-one communication) that is common in AI ML workloads, where many packet streams converge on the same port and buffer almost simultaneously, causing congestion. NetGNT can identify this pattern in real-time at the beginning of it and invoke congestion control techniques to avoid network performance degradation. Since netgnt operates at full line rate in hardware, it has no effect on the amount of data transferred or the latency.
The Trident 5-X12 is software programmable, field upgradeable, and offers 160 terabits of seconds bandwidth, twice as much as the market-leading Trident 4-x9. It also adds support for 800G ports, allowing direct connection to Broadcom's leading Tomahawk 5 (Tomahawk 5), the latest computing and artificial intelligence machine Xi data center backbone structure. The chip's unique positioning allows the 1RU data center TOR to support 48x200G downstream ports and 8x800G upstream ports. Broadcom has begun deliveries of the Trident 5-X12 device.
Coupled with the contribution and assistance brought by the merger of Weirui, Broadcom's prospects are even more impressive. The company expects its full-year revenue for the fiscal year ending November 3, 2024, including Weirui's contribution, to be approximately $50 billion and an adjusted EBITDA margin of approximately 60%, slightly lower than the adjusted EBITDA margin of 64 for fiscal 202381%, or because of Veriz's relatively low profit margins.
But in the long runBroadcom's scale is expanding, and its strength may also be increasing, perhaps what everyone is most concerned about now is not whether the gap between Broadcom and Nvidia will close, but who Broadcom will acquire next, which seems to be faster and more effective than its own development.
Mao Ting