Broadcom stock needs a win. The new OpenAI co-designed Jalapeno chip might do the trick
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CNBC Finance
5 min read
Broadcom shares have lost nearly 20% since early June on what can only be described as a sub-optimal quarter. Could Wednesday's unveiling of Jalapeno, a new custom chip co-designed with OpenAI, put the floor under Broadcom stock? Jalapeno is being described by OpenAI and Broadcom as an artificial intelligence accelerator for a platform the two companies are building "to make advanced AI faster, more reliable, and more accessible to more people." We found out about the Broadcom-OpenAI custom chip deal about eight months ago. Jalapeno is their first joint project. The new chip aims to lower token costs by improving the performance per watt. A token is a unit of AI computation. Energy is the major cost when it comes to running AI models. The news involving OpenAI, the creator of ChatGPT, comes as Broadcom stock fights to get back on track. While Broadcom earnings out the evening of June 3 were good, they were not enough to justify the Club stock's run to record highs two sessions before the print. Broadcom sank 12.6% on June 4 and has been stalled ever since. News that long-term custom silicon customer, Alphabet , was in talks with MediaTek to help design future AI Tensor Processing Units (TPU), and that ByteDance is in talks with Qualcomm to help design future chips, certainly has not helped. To be sure, we don't think either Alphabet or ByteDance is necessarily looking to replace Broadcom as a key design partner. Broadcom and Alphabet previously announced that they entered into a long-term agreement for Broadcom to develop and supply Google with custom TPUs. At the same time, the two entered a supply assurance agreement for Broadcom to supply networking solutions and components for Google's AI racks through 2031. We think the overtures by Alphabet and ByteDance are more reflective of a desire to reduce reliance on a single supplier, and increase supply chain diversity â and, as a result, supply chain security. AVGO YTD mountain Broadcom YTD Fortunately, a bit of good news is sometimes what is needed to turn sentiment around. Following sharp back-to-back losses, Broadcom shares stabilized Wednesday. While we knew the two were working together, and Broadcom did tell us that they had already delivered silicon to OpenAI on the company's earnings call, the Jalapeno news provides increased confidence in deployment timelines and future earnings potential. By leveraging custom silicon and increasing vertical integration, OpenAI, like others before it, is able to be more efficient when running its AI models. However, the same thing that can make custom chips more efficient also makes them less flexible, as compared to the GPU-accelerated solutions offered by Nvidia. For that reason, we see custom silicon as being complementary to Nvidia . That is especially the case when it comes to hyperscale cloud companies like Amazon , Microsoft , and Alphabet that want to rent out compute. It's good to have custom chips available to power AI models at a lower cost per token; however, companies don't want to be in a situation where they need increased flexibility, perhaps to run new or novel workloads, but don't have chips flexible enough to do so. Amazon has also emerged as a major custom chip player. Broadcom CEO Hock Tan told CNBC on Wednesday that many developers will eventually want to develop custom silicon due to the cost benefit of matching hardware with software. In the same interview, OpenAI President Greg Brockman affirmed that Jalapeno is not a replacement for Nvidia but rather an addition to the company's existing infrastructure. While a lower cost per token is obviously a good thing, according to Brockman, the real problem facing OpenAI â and the AI industry broadly â is an overall lack of computing power. Tan characterized that demand as "insatiable." As for the Jalapeno timeline, Tan expects that initial deployment later this year, followed by a ramp-up to scale in 2027, and going "full bore" in 2028. Clearly, Broadcom has strong visibility into the future. Bottom line We like seeing the Broadcom-OpenAI partnership advancing and believe that Jalapeno may help improve sentiment in the Club stock and solidify a floor of support. However, we want to give it a bit more time to play out before upgrading Broadcom back to a buy-equivalent 1 rating. Before its post-earnings decline, we were able to book some Broadcom profits around record highs on June 2, in keeping with our discipline of trimming parabolic moves higher. Broadcom is still a 3%-plus weighting in the Club portfolio. For those who want to start a Broadcom position, shares at current levels are starting to look pretty attractive at 23-times next 12-months earnings estimates. Looking at fiscal 2027 estimates, the stock is trading more like 20 times. For reference, going back to the end of 2023, shares of Broadcom have traded in a forward multiple range of about 20-times to 40-times. So, as it stands now, we are looking at a trough multiple, despite the "insatiable" demand Tan just reaffirmed is still out there. (Jim Cramer's Charitable Trust is long AVGO, GOOGL, NVDA, AMZN, MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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