The growing demand for custom AI chips is becoming a huge growth engine for Broadcom Inc. (NASDAQ:AVGO). The company has secured big deals with some of the world’s largest AI developers. Broadcom’s third-quarter results showed just how quickly that business is scaling, as the company revealed customer commitments extending into 2028.
But with the current supply constraints and intensifying competition, the investment case now depends on whether Broadcom can convert that demand into sustained revenue growth.
Broadcom’s Custom AI Chips Are Driving Explosive Growth
Broadcom’s third-quarter revenue of $29.6 billion nearly doubled year-over-year, and net income more than tripled to $13.1 billion. Adjusted EPS of $3.32 beat the $3.22 consensus expectation.
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The bigger story was AI. Broadcom generated $16.7 billion in AI semiconductor revenue, reflecting a growth of 221% YoY and 54% sequentially. The company expects sales in this segment to keep rising, as it targets $21.7 billion in the fourth quarter, which implies a 236% YoY increase. Custom chips accounted for 73% of Broadcom’s AI semiconductor revenue in the third quarter.
That demand underpins Broadcom’s projection that AI semiconductor revenue will reach $115 billion in fiscal 2027 and double to $230 billion in fiscal 2028. With Broadcom’s AI-chip bookings surpassing $30 billion, the management says current demand actually exceeds that outlook.
The company has begun shipping the latest Google TPU and OpenAI’s Jalapeno chips. Meta’s custom chips are scheduled to begin shipping in the current quarter. Also, the company has begun developing OpenAI’s second and third-generation chips.
The Biggest Risk Is Turning Demand Into Durable Growth
The bullish thesis breaks if those infrastructure commitments fail to translate into sustained chip shipments and revenue growth. Broadcom is already dealing with supply constraints, particularly in memory, and continued shortages could limit how quickly the company converts demand into sales.
Customer concentration presents another risk. Since a relatively small group of AI companies accounts for much of the industry’s demand, changes in the spending plans of companies like Google, Meta, OpenAI, and Anthropic could have a significant impact on Broadcom’s AI business.
Competition is also increasing. Marvell’s recent custom-chip deal with Google shows that hyperscalers have alternatives.
Can Broadcom Sustain Its AI Momentum?
If those commitments translate into sustained shipments, Broadcom could achieve its AI revenue targets and have a long earnings-growth runway. The thesis will be tested by whether bookings continue converting into revenue and cash flow at a pace strong enough to justify Broadcom’s lofty growth expectations.
Hedge fund positioning does not signal a major deterioration in confidence in Broadcom’s outlook. Insider Monkey counted 170 hedge funds in Broadcom in Q2, compared with 173 in Q1. Fisher Asset Management, led by billionaire Ken Fisher, increased its position by 3% to 15.1 million shares. That followed increases of 7% in Q1 and 10% in Q4. Meanwhile, short interest fell 8.15% to 56.21 million shares as of August 14, equal to just 1.2% of the public float, with 3.2 days to cover.
These figures do not prove that Broadcom’s AI thesis will succeed. However, they do suggest institutional ownership remains relatively stable while bearish positioning has eased. For now, the next phase of the story depends less on demand and more on how efficiently the company can turn that demand into sustained revenue and cash flow.
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