Sometimes, news comes along that fundamentally changes how investors should view a stock moving forward. However, this news may not always be obvious. That was certainly the case when Broadcom (AVGO 2.94%) revealed in a filing that it extended its agreement with Alphabet (GOOGL 0.04%) (GOOG +0.05%) to develop and supply future generations of Alphabet's Tensor Processing Units (TPUs).
On the surface, this may not seem like a big deal, as Alphabet and Broadcom have partnered on TPUs for more than a decade. However, the agreement just removed one of the biggest bearish arguments against Broadcom's stock. Broadcom and Alphabet have long been tied at the hip with TPUs, and it's become one of the biggest growth drivers for both companies. While there seemed to be little reason to mess with this mutually beneficial partnership, there was growing concern that Alphabet would eventually look to ditch Broadcom.
Image source: The Motley Fool.
While Broadcom's intellectual property and chip expertise play a big role in the success of Alphabet's TPUs, the chips are ultimately designed to Alphabet's specifications, giving it considerable control. Investors have increasingly feared that Alphabet could bring more of the work in-house or shift to another, cheaper vendor. However, Broadcom's ASIC (application-specific integrated circuit) platform is comprehensive, making it sticky. This deal helps erase those concerns and comes at a critical time, when demand for TPUs is starting to skyrocket.
Explosive growth ahead
In addition to their extended partnership, the two companies also announced that they were expanding their partnership with Anthropic, giving the large language model (LLM) maker access to 3.5 gigawatts of TPUs starting in 2027. The TPUs will be deployed both through Google Cloud and directly supplied by Broadcom. There does seem to be some flexibility in the agreement, with the announcement saying it is dependent on Anthropic's commercial success. Anthropic already has an order with Broadcom to deploy $21 billion worth of TPUs this year.
NASDAQ: AVGO
Key Data Points
Broadcom previously projected that it would deliver $100 billion in custom AI chip revenue alone in fiscal 2027, and with this announcement, that number may be light. TPUs are a huge driver of this growth, and importantly, on its last earnings call, Broadcom said TPU sales will carry gross margins similar to the rest of its semiconductor business. Meanwhile, the company continues to gain new ASIC customers, including OpenAI, who are looking to not be completely beholden to Nvidia and its graphics processing units (GPUs).
Broadcom is set to see explosive growth in the coming years, and the two biggest bear arguments -- lower margins and losing its TPU business -- just got debunked. That makes it one of the best growth stocks to buy right now.
