Broadcom Inc. (NASDAQ: AVGO), a semiconductor, enterprise software, and security solutions provider, saw its stock plunge over 17% on Monday, January 27. This can be attributed to the ripples DeepSeek created, sending tremors through the Silicon Valley. DeepSeek’s more efficient approach challenges the conventional wisdom that bigger and more expensive necessarily means better in AI development.
The Chinese AI lab DeepSeek recently made waves by releasing their DeepSeek-R1 model as open-source software. What makes this noteworthy is that according to the lab’s research, DeepSeek-R1 achieves better performance than prominent models like OpenAI’s o1 and Meta’s Llama across various metrics. The model stands out not just for its performance, but also because it’s freely available, cost-efficient, and demands less computing resources than competitors.
This development has caused concerns in the west, where major tech companies have typically focused on a resource-intensive approach — accumulating massive amounts of computing infrastructure. The situation could have particular significance for Broadcom’s stock, as they’ve emerged as a key player in AI networking technology. But also see DeepSeek Could Boost Intel Stock.
Broadcom’s revenue of 51.6 billion in fiscal 2024 (fiscal ends in October) was up a stellar 44% y-o-y. This can partly be attributed to the contribution from VMware, which it acquired for $69 billion in late 2023. Apart from VMware, Broadcom’s AI products contributed to its top-line growth. The company’s AI revenue in fiscal 2024 stood at $12.2 billion, reflecting a whopping 220% y-o-y growth, driven by strong demand for its AI XPUs (Broadcom’s custom AI accelerators) and Ethernet products. Broadcom is benefiting from the generative AI boom, with its wide suite of networking and storage solutions, cybersecurity, and semiconductor offerings. Broadcom also announced that it’s developing AI chips with three large cloud companies, which reportedly include Google and Meta.
What Does This Mean For AVGO Stock?
Broadcom’s business relies heavily on their networking products — specifically their Ethernet switches and ASICs — which are crucial for data transfer in AI systems. If the market for premium AI chips experiences a downturn, amid the rise of DeepSeek, it could create a domino effect, potentially hurting sales of Broadcom’s supporting technologies and components.
Investors have assigned a higher valuation multiple for AVGO stock, taking into account the expected AI contribution. With the rise of DeepSeek, the investors are now concerned about the sales growth may be slower than earlier anticipated. AVGO stock has seen a solid 84% rise since the beginning of 2024, significantly outperforming the broader S&P500 index, up 26%. Admirably, AVGO stock has generated better returns than the broader market in each of the last four years. Returns for the stock were 56% in 2021, -13% in 2022, 104% in 2023, and 110% in 2024.
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Given the current uncertain macroeconomic environment, with changes in the White House, and the DeepSeek update, could AVGO see a strong jump? We think that investors should tread with caution. This potential shift in the industry toward efficiency over raw power, combined with a broader slowdown, could create additional challenges for Broadcom’s business prospects.
While AVGO stock took a plunge amid the rise of DeepSeek, it is helpful to see how Broadcom’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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