Broadcom Shares Rise After DA Davidson Upgrade on Anthropic, OpenAI AI Outlook

Semiconductor company Broadcom (AVGO) saw its shares climb 3% on Tuesday after investment firm DA Davidson upgraded its rating from 'Neutral' to 'Buy.' The firm also raised its stock price target from $350 to $400. This news, as reported by Yahoo Finance, is based on a detailed review of Anthropic's S-1 filing, a leading artificial intelligence company, for its initial public offering (IPO).

According to DA Davidson, this document indicates that the current artificial intelligence cycle has not ended, a perspective that directly benefits Broadcom due to its role as a key supplier of custom chips for AI companies.

The Optimism Behind the Upgrade

DA Davidson analyst Gil Luria explained that, after studying Anthropic's S-1 document, he believes the company's IPO will proceed and successfully raise the expected capital. This operation, Luria suggests, would pave the way for OpenAI, another AI giant and potential Broadcom customer, to also raise more capital through its own IPO next year.

For Broadcom, this means the ability to meet its revenue expectations for the next couple of years. The market had recently shown some skepticism about Broadcom's growth, specifically due to its dependence on future chip orders from Anthropic and OpenAI, which are set to become its largest custom chip customers. This aligns with broader trends in AI infrastructure, as we discussed in this article about Marvell's AI chip launches.

Broadcom's Role in AI Chips

Market concern centered on the idea that Broadcom's success largely depended on these two emerging AI companies. However, the data from Anthropic's S-1 offers a clearer picture of its financial strength.

The document reveals that Anthropic holds $131 billion in cash and equivalents. It also details a relationship with Broadcom amounting to $161 billion, according to data shared by Yahoo Finance. Analyst Luria believes that Anthropic's gross margins, roughly 50% on net revenue, are healthy enough to justify its future growth. Such partnerships are crucial in a rapidly evolving sector, a topic often explored when discussing the future of AI, like in this piece on AI lab nationalization.

Broadcom's Market Valuation

Luria also highlighted a notable difference in market valuation between large semiconductor manufacturers like Broadcom, Nvidia, and Micron, and the rest of the AI chip sector. While these three companies trade at multiples of 5 to 16 times their projected 2027 earnings per share, other AI semiconductor firms trade at 20 to 40 times.

The analyst argues that a scenario where several semiconductor companies thrive while Nvidia, Micron, and Broadcom, leaders in the field, struggle is unlikely. Currently, Broadcom is trading as if the chances of Anthropic's and OpenAI's IPOs materializing are near zero, which, if they do happen, would represent significant upside potential for the stock.

Why it matters

DA Davidson's upgrade of Broadcom sends a significant signal to the technology and artificial intelligence markets. It suggests that, despite recent doubts, the AI sector's momentum remains strong, supported by the financial health of companies like Anthropic. For Broadcom, this re-evaluation could mean a vote of confidence and a substantial growth opportunity if the anticipated IPO market events unfold as expected.