To The Moon

$Broadcom(AVGO)$ has secured substantial demand confirmation from clients, particularly OpenAI: The company expects to ship approximately $10B worth of products to OpenAI in FY26Q3. Barring significant delays, this development will transform the "story" into "numbers." Management emphasized that rack-scale orders will compress gross margins but significantly amplify operating profit and earnings per share.

Key Points at a Glance

• Management believes that the existing four mega-customers alone can "easily" achieve the lower bound of $90 billion in AI revenue by 2030, with even $120 billion within reach.

• OpenAI's $10 billion order is scheduled for shipment within the company's fiscal year FY26Q3, with a small portion potentially extending into Q4.

• Rack-based solutions are currently primarily adopted by OpenAI, with XPUs accounting for as much as 50–60% of the rack's bill of materials (BOM). However, the rack also includes components such as NICs, DSPs, switches, and PCIe controllers, generating additional revenue.

• Management projects that the unit price of XPU will "easily" reach $50k per unit by 2030. Concurrently, as cluster scale expands, the proportion of network components attached to ASICs will increase from <20% to ~25–30%.

This is more than just a "big deal."

Many investors are fixated on the $10 billion one-time gain—yes, it will significantly boost 3Q's revenue and cash flow, but what truly determines Broadcom's valuation is the marginal contribution after scaling.

Although rack sales compress gross margins, they amplify profit margins. Management noted that rack sales lower the company-level gross margin (due to the high proportion of XPU in the rack BOM and its high ASP), but operating profit and EPS remain "significantly boosted" by the overall revenue base and the high value-added nature of software/network components. In short: Gross margin decline ≠ EPS decline.

More structural replacements from GPUs to ASICs/XPUs. CEO Hock Tan believes that XPU shipments will surpass GPUs in the coming years, and in non-enterprise markets (i.e., hyperscalers/frontier LLMs), the long-term penetration rate of ASICs will continue to rise. This presents a structural advantage for Broadcom's customization and integration capabilities.

Additional revenue pools (networking/storage/software). Racks drive increased demand for networking components and private cloud software. Software is projected to enter high single-digit growth (HSD) as a baseline in the medium term, with potential for >10% upside if microservices and private cloud adoption accelerate. Supply chain and HBM (High Bandwidth Memory) present hidden barriers. Broadcom currently possesses sufficient HBM capacity and passes costs directly to customers via pass-through pricing. This reduces profit risks from inventory/cost volatility but also heightens the company's dependence on HBM manufacturers' expansion plans.

Financial Impact

According to Bernstein's forecast

• Revenue: $51.6B in 2024 → $63.3B in 2025E → $87.2B in 2026E → $122.3B in 2027E.

• Non-GAAP Diluted EPS：2024A $4.86 → 2025E $6.73 → 2026E $9.38。

• Non-GAAP Gross Margin: 2024 76.5% → 2025E 78.6% → Expected to decline to 71.5% by 2027E (reflecting downward pressure on gross margin following the transition to a hybrid rack/ASIC model).

• Free Cash Flow: 2024 $19.4B → 2025E $30.7B → 2026E $46.2B (Strong cash generation capability).

Based on valuation, with a 35x multiple on the average FY26/27 EPS ($11.38), the target price could reach $400. At the closing price of $336.41, this implies 19% upside potential.

Risk

• If the $10B shipment experiences significant delays or is split into longer cycles, it will strain short-term revenue and market response.

• Gross Margin/Mixed Risk: If rack sales consistently exceed expectations over the long term, they may persistently depress the company's overall gross margin, a factor to which the market is highly sensitive.

• Customer Concentration and Volatility: Broadcom is deeply tied to a handful of mega-customers in the high-end ASIC market, where any strategic shift or in-house production decision by a single customer can have a magnified impact.