Broadcom stock has fallen nearly 20% in a suboptimal quarter since early June. Could Wednesday’s announcement of Jalapeno, a new custom chip co-designed with OpenAI, lower the floor for Broadcom stock? OpenAI and Broadcom describe Jalapeño as an artificial intelligence accelerator on a platform that the companies say “makes advanced AI faster, more reliable, and more accessible to more people.” We learned about Broadcom’s custom chip deal with OpenAI about eight months ago. Jalapeno is their first collaborative project. The new chip aims to reduce token costs by increasing performance per watt. Tokens are units of AI calculation. The main cost of running an AI model is energy. The news about ChatGPT developer OpenAI comes as Broadcom stock struggles to get back on track. Broadcom’s financial results released on the night of June 3 were positive, but not enough to justify the club’s stock hitting an all-time high two days before the article was published. Broadcom fell 12.6% on June 4 and has stalled since then. News that long-time custom silicon customer Alphabet is in talks with MediaTek to help design future AI Tensor Processing Units (TPUs) and ByteDance is in talks with Qualcomm to help design future chips certainly didn’t help. Indeed, I don’t think either Alphabet or ByteDance are necessarily looking to replace Broadcom as their primary design partner. Broadcom and Alphabet previously announced a long-term agreement for Broadcom to develop and supply custom TPUs to Google. At the same time, the two companies signed a supply guarantee agreement with Broadcom, which will supply networking solutions and components for Google’s AI Rack through 2031. The proposals by Alphabet and ByteDance are seen as more reflective of a desire to reduce dependence on a single supplier, increase supply chain diversity and, as a result, increase supply chain security. AVGO YTD Mountain Broadcom YTD Fortunately, sometimes all it takes is a bit of good news to turn sentiment around. Broadcom stock stabilized on Wednesday after a series of steep declines. We know the two companies are working together, and Broadcom did say on its earnings call that it had already delivered silicon to OpenAI, but Jalapeño’s news increases confidence in the implementation schedule and future revenue potential. By leveraging custom silicon and increasing vertical integration, OpenAI, like no other company before it, can now run AI models more efficiently. However, the same thing that can make custom chips more efficient also makes them less flexible compared to the GPU acceleration solutions offered by Nvidia. That’s why we believe custom silicon is complementary to Nvidia. This is especially true for hyperscale cloud companies like Amazon, Microsoft, and Alphabet who want to rent their computing. It’s good to have custom chips available to power your AI models at a low cost per token. But enterprises don’t want to find themselves in a situation where they need more flexibility to run new or novel workloads, but don’t have a chip that’s flexible enough to do so. Amazon is also emerging as a major player in custom chips. Broadcom CEO Hock Tan told CNBC on Wednesday that many developers will eventually want to develop custom silicon because of the cost benefits of matching hardware and software. In the same interview, OpenAI President Greg Brockman asserted that Jalapeno is not a replacement for Nvidia, but an addition to the company’s existing infrastructure. While a lower cost per token is obviously a good thing, the real problem facing OpenAI, and the AI industry as a whole, is a lack of overall computing power, according to Brockman. Mr Tan characterized the demand as “insatiable”. As for Jalapeño’s timeline, Tan expects the initial rollout to occur later this year, then scale up in 2027, and become “full-fledged” in 2028. Clearly, Broadcom has a strong outlook for the future. Conclusion We like to see Broadcom and OpenAI’s partnership develop and believe Jalapeno could help improve sentiment and solidify support for the club’s stock. However, we’d like to give Broadcom a little more time to consider before reverting it to a Buy rating of 1. Following our discipline of trimming parabolic moves higher before earnings subsequently declined, we were able to book some of Broadcom’s profits near the June 2nd all-time high. Broadcom remains a more than 3% weight in the club’s portfolio. For someone looking to start a position in Broadcom, the stock is starting to look pretty attractive at current levels, with the stock trading at 23 times forward 12-month earnings. Looking at the forecast for fiscal 2027, the stock is trading at nearly 20 times the forecast. For reference, going back to the end of 2023, Broadcom stock has been trading at forward multiples of approximately 20x to 40x. Therefore, we currently expect a minimum multiple, even though the “insatiable” demand that Mr. Tan just reaffirmed remains present. (Jim Cramer’s charitable trusts are long AVGO, GOOGL, NVDA, AMZN, MSFT. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. 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