When talking about generative AI, people generally think of OpenAI. The rise of OpenAI has caused major technology giants around the world to get involved in AIGC and large model fields. This trend not only drove the market value of NVIDIA (NVDA.US) to increase significantly by 2

When talking about generative AI, people generally think of OpenAI. The rise of OpenAI has caused major technology giants around the world to get involved in AIGC and large model fields. This trend not only drove the market value of NVIDIA (NVDA.US) to increase significantly by 234.69%, but also caused the market value of its competitor Advanced Micro Devices (AMD.US) to increase by 114.84%.

In fact, there is another AIGC concept stock that has more than doubled this year - Broadcom (AVGO.US) . Since the beginning of the year, its stock price has increased by 105.71%, with a market value of US$528.8 billion (approximately 3.77 trillion yuan). This means that Broadcom’s market value has increased by US$271.7 billion (approximately 1.94 trillion yuan) this year. After announcing its fiscal year 2023 results and successfully completing the acquisition of VMware, Broadcom's market value has reached new highs, as shown in the figure below.

Caihua News Agency believes that Broadcom’s strong stock price trend this year is mainly driven by the following two factors:

. As large technology companies have deployed AIGC, Broadcom’s semiconductor business revenue has achieved strong growth. Looking into the future, the revenue contributed by AI will also increase further.

. Broadcom successfully acquired VMware, which further expanded its infrastructure software business, adding a lot of points to the expected increase in stock price and performance.

Broadcom’s expansion history: Acquisition mania

Broadcom successfully completed the US$61 billion acquisition of VMware last month, making it the second largest merger and acquisition in the world this year, second only to Microsoft (MSFT.US)’s US$69 billion acquisition of VMware. Depending on Blizzard's deal.

For Broadcom, which started with acquisitions and continues to expand and adjust its business through mergers and acquisitions, the acquisition of VMware is not uncommon and can be said to be a routine operation.

In terms of large-scale transactions, Broadcom tried to acquire Qualcomm (QCOM.US) in a cash and stock deal in 2017, with a total consideration of US$130 billion. However, the deal was rejected by the United States on security grounds in early 2018 and therefore could not be completed. This scale far exceeds the acquisition of VMware.

Looking back on the development history of Broadcom, Caihua News found that it has always maintained its love for "buy, buy, buy". In the long process of acquisitions, 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 Avago, with dazzling capital operations behind it.

In 1991, the former "Broadcom" was co-founded by an engineering professor and his students distributed by the University of California, Los Angeles. It mainly developed broadband communication chips for TV set-top boxes and was launched in the United States in 1998. In terms of the predecessor of

Avago, HP (HP.US) conducted a strategic reorganization in 1999 and announced the spin-off of the measurement and computing and imaging businesses. By June 2000, the measurement business Agilent Technologies (A.US) was independently listed on the New York Stock Exchange. It is mainly engaged in the research and development, production, sales and technical services of products in the fields of communications and life sciences.

In 2005, private equity firms KKR and Silver Lake acquired Agilent's semiconductor products business for US$2.66 billion and established Avago Technologies, the world's largest privately held independent semiconductor company at the time.

In 2009, Avago was listed in the United States and is mainly engaged in the design and development of semiconductors for optical fiber networks and wireless communication networks. In 2014, Avago acquired LSI for $6.6 billion, which mainly produces storage system components, including dual data rate memory, read channels on a single chip, RAID controllers, custom ASICs, hardware controllers, etc.

The turning point was in 2016. After the merger, Broadcom completely let itself go and continued to "buy, buy, buy."

On February 1, 2016, the former "Broadcom" merged with Avago. Avago became the surviving company after the merger, but was renamed Broadcom. The total cost of this merger was US$35.7 billion. At the same time as the merger, the merged entity was also sold. It also acquired some non-core Broadcom businesses and raised a total of US$380 million in cash.

In 2017, Broadcom, which failed to acquire Qualcomm, turned around and acquired Brocade, a provider of network hardware, software and services, including FC SAN products and Internet Protocol Network (IP network) solutions, in order to enhance its role as an enterprise storage position as a connectivity solutions provider, expand its enterprise storage product portfolio, and further meet the evolving needs of its OEM customers.

To facilitate this acquisition, Broadcom partially financed the acquisition by issuing 2017 senior notes. The total consideration was US$6.038 billion. After deducting Brocade's cash of US$1.25 billion, the net consideration was US$4.788 billion. After merging with Brocade, Broadcom sold Brocade's IP network business on December 1, 2017 for US$800 million.

On November 5, 2018, Broadcom completed the acquisition of CA, an information technology (IT) management software and solution provider. The purpose of Broadcom's acquisition of CA is to enhance its infrastructure software business capabilities. Similarly, in order to accelerate this acquisition, Broadcom did not hesitate to spend tens of billions of dollars.

On November 4, 2019, Broadcom completed the acquisition of Symantec Business, a leading cybersecurity company, for US$10.7 billion in cash, mainly financed through loans.

On May 26, 2022, Broadcom entered into an agreement and merger plan to acquire VMware in a cash and stock model for a total consideration of approximately US$61 billion (based on Broadcom’s common stock closing on May 25, 2022). Market price), second only to Microsoft’s $69 billion acquisition of Activision Blizzard.

According to the merger agreement, existing shareholders will have the option to receive US$142.50 in cash (excluding interest) or 0.2520 Broadcom common shares for each VMware common share held. Broadcom announced on November 22, 2023 that it had completed the acquisition of VMware, and VMware was delisted from the New York Stock Exchange.

VMware is a multi-cloud services company and a leader in virtualization and cloud computing infrastructure. Broadcom acquired VMware to strengthen its infrastructure software business. Shortly after the completion of this acquisition, on December 11, VMware announced that it would stop selling perpetual licenses and change its solution to a subscription model.

Broadcom's Basics: Semiconductors and Infrastructure Software

Broadcom designs, develops and supplies a range of semiconductors, 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 devices and broadband connectivity, mainframe, network security, and private and hybrid cloud architectures.

Its revenue mainly comes from two major business segments: semiconductors and infrastructure software .

Currently, in the semiconductor field, Broadcom provides semiconductor solutions for data management and transfer of data centers, service contractors, enterprises and embedded network applications; provides a variety of radio frequency (RF) semiconductor equipment, wireless connection solutions, customized touch controls and inductive charging solutions; also provides semiconductor solutions for supporting set-top boxes and broadband access applications, as well as enabling the transfer of digital data from hosts (such as servers, personal computers and storage systems) to underlying storage devices (such as hard disk drives ("HDDs")). ”) and solid-state drives (“SSD”)). In terms of

infrastructure software, Broadcom provides customers with infrastructure software solutions, enabling customers to build, run, manage, connect and protect applications on a large scale in diverse and distributed environments. Its mainframe software business provides DevOps, AIOps, security and data management system solutions. Distributed software solutions empower multinational enterprises to optimize software planning, development and delivery. Broadcom acquired Symantec's institutional business in 2019 to provide security protection for enterprises and institutions.

It is worth noting that with the rapid development of cloud computing and artificial intelligence and machine learning relying on massive data, the demand for data security is also getting higher and higher. Symantec's security business can just meet this demand.In terms of

sales model, Broadcom mainly sells through direct sales and a network of distributors and channel partners. Distributors and OEMs account for a large part of Broadcom's semiconductor sales, and sales to Apple (AAPL.US) account for a large portion of its revenue. About 20%.

In terms of production, Broadcom outsources most of its production activities, so its gross profit margin is also relatively high. In the fiscal year ending at the end of October 2023, the overall gross profit margin is as high as 68.93%. R&D expenditure is Broadcom's main expenditure, accounting for about 15% of its total revenue.

Highlights: The impact of VMware's acquisition on Broadcom

Broadcom's 2023 fiscal year end date is October 29, 2023, so VMware, which completed the acquisition on November 22, will be merged into its fiscal year ending in 2024 The results for the 2024 fiscal year ending at the end of October only include results after November 22 (approximately equivalent to 11 months).

Before VMware joined, Broadcom's infrastructure software business only included contributions from CA, Symantec and Brocade, as shown in the figure below. Compared with the semiconductor business, this segment's revenue share is not too large.

Broadcom acquired Brocade in 2017, CA in 2018, Symantec in 2019, and VMware by fiscal 2023. Broadcom is strengthening its infrastructure software business.

Caihua News Agency noticed that the operating profit margin of 's infrastructure software business segment is usually more than 10 percentage points higher than that of the semiconductor business segment, and the software business is easier to establish long-term and sustainable relationships with customers, that is, It is not difficult to understand why Broadcom spent so much time on acquisitions.

Caihua News Agency compared the performance data of Broadcom's infrastructure software business segment and VMware for the two financial quarters ending at the end of July 2023 (or early August) and found that VMware's operating profit margin was lower than Broadcom's infrastructure For the software business, the main reason may be that VMware needs to invest a lot of R&D and marketing expenses. Perhaps Broadcom's current R&D and business advantages can bring support to VMware. On the other hand, VMware's revenue scale is much larger than Broadcom's current infrastructure software business segment.

Judging from VMware's six-month performance as of August 4, 2023, its half-year revenue was US$6.685 billion, gross profit was US$5.402 billion, and gross profit margin reached 80.81%; R&D expenses were US$1.682 billion, accounting for 10% of revenue. 25.16%; sales and marketing expenses were US$2.205 billion, accounting for 32.98% of total revenue. Operating profit was US$855 million, operating profit margin was 12.79%, net profit was US$701 million, and net profit margin was 10.49%.

In contrast, Broadcom's infrastructure software business had revenue of US$3.86 billion in the six months ended July 30, 2023, which is only equivalent to 57.74% of VMware. can predict that after merging VMware's performance, Broadcom's infrastructure software business revenue will increase significantly.

Broadcom’s fiscal 2024 results mentioned this. Broadcom management stated at the results conference that in the 2023 fiscal year ending at the end of October 2023, Broadcom's software business only includes CA, Symantec and Brocade, and recorded revenue of US$7.637 billion during the period, a slight increase of 3.41% year-on-year. %.

management expects that its existing software business revenue will increase from US$7.6 billion to US$8 billion next year, a year-on-year growth of 4%. However, due to the addition of VMware, which has leading technology, not only computing power, but also the ability to virtualize the entire data center to create a local private cloud, management expects VMware to contribute US$12 billion in revenue in fiscal year 2024 (11-month contribution), so its overall software business revenue is expected to reach $20 billion.

In other words, due to the addition of VMware and the slight growth of existing business, Broadcom's software business revenue may increase by 163% by fiscal year 2024.

In addition, the company expects that the merger of VMware's business may result in expenditures of US$1 billion. Caihua News Agency predicts that after the merger with VMware, with the expansion of revenue scale and the emergence of synergistic benefits after integration, the revenue and profits of Broadcom's software business are expected to be significantly improved.

Variable: With the blessing of AI concept, the network business is undergoing transformation

In the past, the semiconductor business has been Broadcom’s main source of income. After merging with VMware, its software business may be able to compete with the semiconductor business.

In fiscal year 2023, Broadcom’s semiconductor business revenue was US$28.182 billion, accounting for 78.68% of total revenue. It is worth noting that the business unit’s network revenue in the fourth quarter was US$3.1 billion, a year-on-year increase of 23%, accounting for 42% of its total semiconductor revenue, mainly due to strong demand for its customized AI accelerators from ultra-large-scale users, and Its network switches, routers and network interface cards (NICs) are in strong demand, equipment designed to expand AI data centers. In addition, there is also a push for ultra-large-scale enterprises to deploy Ethernet in their AI networks.

In fiscal 2023, network business revenue increased by 21% year-on-year to US$10.8 billion. Excluding AI accelerators, network connectivity revenue is approximately $8 billion. management expects network business revenue to increase by 30% year-on-year in fiscal 2024, mainly driven by the acceleration of network connections driven by the accelerated deployment of AI accelerators by very large enterprises.

It is worth noting that generative AI accounted for 15% of Broadcom’s total semiconductor business revenue in fiscal year 2023. Looking forward to fiscal year 2024, Broadcom expects semiconductor solution business revenue to grow by 5% to 10%, and from generative AI Its revenue will account for 25% of its total semiconductor revenue, enough to offset the impact of flat or declining non-AI semiconductor revenue.

Conclusion

As the demand for generative AI continues to grow, acquisitions will ensure that Broadcom’s semiconductor business will still maintain growth in the industry down cycle. In addition, its infrastructure software business segment is also actively 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 Generic 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 pipe is one packet/one path, meaning it looks at one packet as it takes a specific path through the chip's ports and buffers. NetGNT, by contrast, is a machine learning 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 common in AI/ML workloads called "incast," in which many packet flows converge on the same port and buffer at nearly the same time. area, causing congestion. NetGNT can identify this pattern in real time when it begins and invoke congestion control techniques to avoid network performance degradation. Because NetGNT runs at full line rate in hardware, there is no impact on transfer data volume or latency.

Trident 5-X12 is software programmable and field upgradeable, delivering 16.0 terabits/second of bandwidth, twice that of the market-leading Trident 4-X9. It also adds support for 800G ports, allowing direct connectivity to Broadcom’s leading Tomahawk 5, the latest backbone/fabric for computing and artificial intelligence/machine learning data centers. The chip is uniquely positioned to enable 1RU data center ToR to support 48x200G downlink ports and 8x800G uplink ports. Broadcom has started shipping Trident 5-X12 devices.

coupled with the contribution and assistance brought by the merger of VMware, Broadcom's prospects are even more promising. The company expects that for the fiscal year ending November 3, 2024, including the contribution of VMware, its full-year revenue may be approximately US$50 billion, and its adjusted EBITDA margin will be approximately 60%, slightly lower than that of fiscal 2023. The adjusted EBITDA profit margin for the year was 64.81%, perhaps because VMware's profit margin is relatively low.

But in the long run, Broadcom'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 narrow, but who Broadcom will acquire next. This seems to Faster and more effective than developing it yourself.