What Happened?
Shares of fabless chip and software maker Broadcom (NASDAQ:AVGO) fell 13.6% in the morning session as stocks heavily tied to the AI market took a hit after Chinese artificial intelligence startup DeepSeek released a new large language model (DeepSeek-R1) that ranks competitively on key global benchmarks (coding competitions, math evaluations), uses less advanced semiconductor chips, costs significantly less to build (at $5.5 million - excluding non-compute costs), and has already achieved strong adoption after topping the iPhone App Store for AI apps.
Notably, the company has also open-sourced this model, a move that may make it harder for rivals to justify huge upfront expenditures on hardware, software, and expertise to develop similar systems.
Speaking at the World Economic Forum in Davos, Switzerland, Microsoft CEO Satya Nadella praised DeepSeek's efforts, calling the new model "super impressive" for its open-source design, efficient inference-time computing, and high compute efficiency. "We should take the developments out of China very, very seriously," he added.
Nadella's comments suggest that upstarts like DeepSeek could reshape the competitive landscape of AI. DeepSeek's announcement disrupts long-held assumptions in key ways: 1.) It undercuts the narrative that bigger budgets and access to top-tier chips are the only ways forward for AI development. 2.) By using less advanced hardware, DeepSeek opens the door for innovators who face high chip costs or export restrictions, reaffirming they can still compete. 3.) The model's success questions the growth narrative of chipmakers like Nvidia—whose soaring valuations depend on the demand for cutting-edge, high-performance hardware.
Overall, DeepSeek's model demonstrates that AI innovation is no longer a race fueled solely by how much you spend, but rather by how resourceful you can be with what you have.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Broadcom? Access our full analysis report here, it’s free.
What The Market Is Telling Us
Broadcom’s shares are very volatile and have had 25 moves greater than 5% over the last year. But moves this big are rare even for Broadcom and indicate this news significantly impacted the market’s perception of the business.
The biggest move we wrote about over the last year was 8 months ago when the stock gained 15.1% on the news that the company reported a "beat-and-raise" quarter. Broadcom exceeded analysts' revenue expectations and shrank its inventory levels. The revenue beat was driven by strong AI demand and VMware, a company it acquired in November 2023. To provide some color on the AI front, AI revenues in the quarter clocked in at $3.1B, up 280% y/y, driven by strong Google TPU demand and AI networking revenue. This strong AI performance helped to offset cyclical weakness in semiconductor revenue from enterprises and telcos. The software segment also gained from the growing contribution from VMware, which is set to hit a $4B quarterly revenue run rate. In Q2’2024, VMware drove $2.7B in revenue (up from $2.1B in the previous quarter).
Looking ahead, AI revenue in FY24 was projected to exceed $11B and grow over 150% y/y. For the full year, revenue guidance ($50.5 billion at the midpoint) and EBITDA guidance (approximately 61 percent of projected revenue) topped Wall Street's estimates. Similar to Nvidia, the company announced a 10-for-1 stock split. Zooming out, we think this was a great quarter, showing it's staying on track.
Broadcom is down 6.9% since the beginning of the year, and at $216.00 per share, it is trading 13.6% below its 52-week high of $250 from December 2024. Investors who bought $1,000 worth of Broadcom’s shares 5 years ago would now be looking at an investment worth $6,987.
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