Where we stand on Broadcom after Marvell tie-up with customer Google
Every weekday, the CNBC Investing Club with Jim Cramer releases the Homestretch — an actionable afternoon update, just in time for the last hour of trading on Wall Street. Markets are on pace to break a three-session losing streak. One of the big stories of the day is the Treasury Department’s announcement that it will more than double the size of its buyback operation. The news caused long-dated bonds to rally and pushed yields lower, though some of those gains were tempered as oil prices continued to climb. Of course, that purchase will need to be funded somehow, explaining why yields on short-dated Treasuries like the 1-year and 2-year moved higher. Minutes from the Federal Reserve’s July meeting, released this afternoon, showed that several participants argued that policy tightening would be necessary if inflation did not decline. AI stocks were hit hard on Wednesday as volatility in the group continued. Some headlines that may be hurting the trade were The Wall Street Journal’s report of sluggish second-quarter revenue growth and widening losses at OpenAI. It’s worth noting that OpenAI said its growth rate has picked up in July following the launch of new AI models. Growing political pushback against data center development may also be a factor. As money rotated out of the AI buildout stocks, it rotated into healthcare, consumer, and materials stocks. We took advantage of this week’s rally in healthcare by selling a sliver of our Eli Lilly position at record highs. Broadcom shares are under pressure after Google, its flagship custom chip customer, inked a deal with rival Marvell Technology . The reflex to sell Broadcom on the news is understandable, though we’re not heading for the exits yet. Marvell revealed an expansive partnership with Google in a securities filing Wednesday, saying that it “spans a comprehensive range of custom silicon programs that attach to the TPU ecosystem,” including components related to memory and storage. Broadcom has co-designed tensor processing units (TPUs) with Google for about a decade. As part of the deal, Marvell also issued stock warrants to Google valued at roughly $12.2 billion. The tie-up supports the bear case against Broadcom: that Google will increasingly partner with other suppliers to develop and implement its custom AI compute systems. Investors are responding accordingly on Wednesday, sending Broadcom shares down 5% and on pace for their lowest close since early July. The decline coincides with a down day for the broader chip complex, with the iShares Semiconductor ETF down about 2%. For its part, Marvell shares are jumping about 7% on the news. Broadcom and Google have worked together on TPUs since the chip’s early days — it’s now in its eighth generation — with Broadcom serving as a co-designer and a key conduit to Taiwan Semiconductor Manufacturing Co. to get the chip blueprints fabricated into real-world products. TPUs belong to the class of chips known as AI accelerators, which are tailored to perform the mathematical computations that underpin generative AI models. Accelerators are just one component of AI compute systems, which also include central processing units (CPUs), networking equipment for transmitting data, and memory and storage systems for retaining data. Delivering fast and efficient AI computing requires close coordination across these layers of the system. As the AI boom progresses and Google’s compute needs evolve, the market has grown increasingly concerned that the search giant will drift away from Broadcom — potentially by designing more chip components in-house or by working with other partners, such as Marvell and Taiwan’s MediaTek. Those worries didn’t dissipate even after Broadcom in April disclosed an agreement to develop and supply future generations of TPUs, along with networking and other components, through 2031. To be sure, the concern that Google would eventually diversify always had some merit. Broadcom CEO Hock Tan acknowledged as much on Broadcom’s most recent earnings call, in early June, when he was asked about the 2031 agreement and concerns about share loss with Google. “It’s a very, very strong agreement,” Tan said. “It’s a commitment that is very substantial in dollars – a very, very substantial amount of dollars. Now we also accept the fact that, while we like to win every design in that program, we also accept the fact that given the growth of development and consumption of AI compute even by our partner, Google, that we fully expect that there will be some diversity of sources for them. But our commitment from them is a very substantial dollar amount.” The counterargument was also that, as Google’s overall AI spending likely expanded, a smaller share of a much larger pie could still lead to a windfall for Broadcom. Plus, Broadcom’s custom silicon business has secured a bunch of new customers — including OpenAI, Anthropic, Meta and Apple — making it less reliant on Google for AI revenue. Broadcom expects to do $56 billion in AI chip revenue this year and more than $100 billion in fiscal 2027. That’s formidable growth in general, and especially at that scale. Ultimately, we would’ve preferred Broadcom to win this business that went to Marvell. However, Marvell’s inclusion of warrants to Google adds a wrinkle. Some chip companies have been willing to give up ownership to land business during this feverish AI buildout. For example, Advanced Micro Devices issued warrants to Meta and OpenAI as part of compute supply agreements to steal market share from Club name Nvidia . But that’s not something we would expect Tan to do, because warrants dilute existing investors’ holdings in the company. He’s known to drive a hard bargain with customers, while doing what’s necessary to deliver for shareholders over the long term. While we appreciate Tan’s stance and his hesitance to be overly involved in what some describe as circular financing, many of these deals have led to significant increases in market cap at the time of announcement. Time will tell what strategy is best for long-term shareholder value creation. So, where do we stand on Broadcom now? For starters, during last week’s Monthly Meeting , Jim Cramer noted that Broadcom was not in his inner circle of favorite chip stocks. He placed Nvidia, Intel and Micron , our newest name, above Broadcom. The Google-Marvell deal doesn’t torpedo the Broadcom story, but it certainly validates some of the overhangs on the stock. It’s a quiet night of earnings with only Coty scheduled to report. Before the opening bell on Thursday, we’ll see earnings from Walmart , Alibaba , Advance Auto Parts , and Deere . Weekly jobless claims and the Philadelphia Fed Business Outlook are on the economic calendar for Thursday. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) 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. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
