Deeply tied to OpenAI, Broadcom is accompanying Altman in a high-stakes "AI gamble."

```

Broadcom’s deep cooperation with OpenAI is a high-stakes gamble with both high risk and high reward.

On Monday, a WallstreetCN article reported that rumors of Broadcom developing a large number of chips and computing systems for OpenAI pushed its stock price up nearly 10% on Monday. This agreement is part of a series of procurement plans that OpenAI has reached with top global AI chip suppliers, including Nvidia and AMD.

According to reports, OpenAI plans to invest billions of dollars to fill data centers with hundreds of thousands of chips, with total power consumption reaching 26 gigawatts, a figure that dwarfs the summer peak electricity demand of New York City. However, this is just one-tenth of the eight-year construction plan that OpenAI CEO Sam Altman has revealed to employees.

However, the key question is that it remains unclear how OpenAI will pay for this. This superstar AI startup is expected to generate about $13 billion in revenue this year, which is already considerable but far from enough to support the massive expenditures depicted by Altman. The company has told investors that it does not expect to be profitable until 2029.

For Broadcom, this means committing substantial resources to a highly uncertain client.

Potential Rewards and Risks Behind the Gamble

For Broadcom, the cooperation with OpenAI paints an enormous business outlook, but comes with commensurate risks.

Bernstein Research analyst Stacy Rasgon estimated on Monday that this deal has the potential to bring Broadcom "well over $100 billion" in additional revenue over the next three to four years.

OpenAI’s narrative is that artificial intelligence will achieve exponential growth, and those competitors who hesitate because of risk aversion will ultimately be eliminated. Altman has discussed using new financing tools to fund his ambitions, increasingly relying on large-scale debt.

But for Broadcom, this is essentially a major bet on a high-risk customer. There is reason to doubt whether Altman’s grand goals will ultimately be realized. If OpenAI’s growth fails to meet expectations, Broadcom will be directly impacted.

Compared with Nvidia or AMD, Broadcom’s bet in this gamble is even bigger, because the customized nature of the cooperation entails higher costs. More crucially, once OpenAI’s operations run into trouble, these systems developed specifically for it will be hard to repurpose for other customers.

Broadcom CEO Hock Tan admitted in a recent discussion with analyst Stacy Rasgon that although developing large AI systems will boost the company’s profits, it will also dilute its gross margin, although he did not disclose the specific extent.

In this sense, Broadcom’s wager on OpenAI is even bigger than Nvidia’s or AMD’s.

Rising Competition and Valuation Challenges

Despite the seemingly promising cooperation with OpenAI, Broadcom is facing increasingly fierce competition in its custom chip business, and its lofty valuation is causing confusion among some market participants.

Nvidia and AMD are still actively vying for OpenAI’s orders, which could trigger a price war and further squeeze Broadcom’s profit margin.

A warning sign: Google, the core client of Broadcom's custom chip business, has started collaborating with Taiwan’s MediaTek to develop custom AI chips.

Broadcom’s stock price is currently about 40 times next year’s expected earnings. To some extent, this benefits from CEO Hock Tan’s outstanding track record in boosting efficiency and squeezing profits, having turned Broadcom into a highly profitable company with an overall gross margin exceeding 70%.

But what is hard to explain is that for much of this year, Broadcom’s forward price-to-earnings ratio has been higher than Nvidia’s. The latter is the undisputed market leader in AI chips and has a much broader customer base.

Analysts believe that being tied to OpenAI may underpin Broadcom’s sales growth for years to come, but given that OpenAI’s ambitious vision still lacks a clear financial model, investors should not see this as a sure-fire deal.

Risk warning and disclaimerThe market is risky, investments need to be cautious. This article does not constitute personal investment advice and does not take into account the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investments made accordingly are at your own risk. ```