Melius analyst estimates Broadcom's benefit from the OpenAI deal at $40 billion a year

Melius Research analyst Ben Reitzes believes that the agreement with OpenAI will bring a significant increase in revenue for chip developer Broadcom. The project was announced on Monday, October 13. And while its margins may be lower than other Broadcom businesses, the potential revenue and profit growth outweighs those risks, the analyst said.

Melius Research analyst Ben Reitzes believes that a new agreement between OpenAI, the company that developed ChatGPT, and chipmaker Broadcom will bring the latter a significant increase in revenue, MarketWatchreports. According to Reitzes, the deal will be a "complement" to Broadcom CEO Hock Tan's previously announced plan to double revenue from AI chips in the current fiscal year and again next year. It could also be the beginning of a long-term partnership between the companies, the analyst said.

OpenAI and Broadcom said they will jointly design, manufacture and deploy AI processors with a combined capacity of 10 gigawatts. Reitzes estimates that revenue per gigawatt could be about $20 billion over the life of the deployment, yielding a potential annualized revenue increase of about $40 billion per year. By comparison, in fiscal 2024, the AI division brought Broadcom $12.2 billion in revenue, Reuters recalls . Revenue from the OpenAI collaboration is expected to start showing up in financial results between the second half of 2026 and 2029, the Melius analyst pointed out .

While large sums are involved in AI deals, investors are increasingly looking at the profitability of such arrangements. Nevertheless, Reitzes sees no reason to worry, even if the profitability of the deal turns out to be lower than that of Broadcom's other businesses. "We wouldn't be surprised if the deal turns out to be less marginal," the analyst said, "but with such expected EPS and revenue growth, that risk is immaterial.

After the announcement of the agreement with OpenAI, Broadcom shares jumped by almost 10% on October 13. On October 14, the quotations fell, declining by 2.7% at the time of publication of this text.

Against the backdrop of the deal with OpenAI, several analyst companies and banks updated their target prices for Broadcom shares. Deutsche Bank raised its target to $400, which implies a potential upside of 12% to the closing level on October 13, and reiterated a "buy" recommendation. It expects the partnership with the leading AI startup to bring the company up to $100 billion in revenue,Investing.com writes .

Mizuho raised its target price to $430, which is 20% higher than the current quotations. He estimated the benefit from cooperation with OpenAI at $150-200 bln.

The vast majority of Wall Street analysts advise investors to buy Broadcom shares - the company has 45 such recommendations, MarketWatch shows . And only four analysts took a neutral stance. There are no "sell" recommendations.

Broadcom on Tuesday unveiled a new networking chip called Thor Ultra that will allow companies to build AI systems by combining hundreds of thousands of processors to process data, Reuters reported . The product will be able to compete with Nvidia's network interface chips and strengthen Broadcom's control over network communications inside data centers dedicated to AI applications, the agency noted.

This article was AI-translated and verified by a human editor