We bought Broadcom (AVGO)

On Thursday, we initiated a new position in Broadcom (AVGO) while exiting Adobe (ADBE), on behalf of clients in Flagship.

Let’s dive in.

AI inference comes front and center

If you’ve been following the rapid advancements in artificial intelligence, you surely saw last week’s launch of o3 from OpenAI. We believe it represents a significant breakthrough in AI’s ability to do complex reasoning that previously only humans could do, as evidenced by its step-function improvements on some of the most difficult artificial general intelligence (AGI) benchmarks.  

The natural follow-up question is: “what does this mean for the AI ecosystem?”

The short answer: accelerating demand for inference compute. 

We think companies will now race faster than ever to buy far more compute, memory, and networking components than previously expected. Specifically, we believe they will direct that spend at improving performance at inference which is where complex reasoning is happening. As a result, we anticipate that custom application-specific integrated circuits (ASICs) will become an increasingly important sub-segment of the AI ecosystem. 

Broadcom (AVGO) is a key provider (with market share of 50%+) of these custom chips with key strategic relationships with some of the biggest hyperscalers in the world, including Amazon, Google, and Meta.

While much of the current focus still remains on AI pre-training, we believe the market is underestimating how important AI inference (test-time compute) will be, and how strong Broadcom’s dominance in this market is given their cutting edge computing systems and diverse portfolio of chips which position them to excel across various sectors that require specific verticalization, such as autos and industrials. 

While estimates from Morgan Stanley suggest that the custom AI chip market will grow from $12 billion up to $30 billion by 2027 (chart below), we believe the recent breakthroughs in reasoning might steepen this trendline and accelerate a tidal wave of investment in inference-focused compute and supporting networking infrastructure. This would drive strong demand for Broadcom’s ASIC/networking solutions with AI revenues compounding at 35%+ per year over the next several years.

Broadcom’s recently signed partnerships with OpenAI and Apple, on top of the o3 model’s reasoning breakthroughs, are clear “why now” catalysts for the stock that we believe warrant an initiated position in Flagship with plans to add as our thesis unfolds.

Exiting Adobe (ADBE)

In order to fund our new position in Broadcom, we elected to exit Adobe (ADBE). We have been disappointed with its mediocre execution and lack of clear vision when it comes to artificial intelligence just as competitive headwinds intensify. The company’s recent struggles have soured investor sentiment, and we believe the opportunity costs of holding Adobe are too high given its current risk / reward profile relative to Broadcom. 

The results of the trade maintain Flagship’s net exposure of ~100%. As always, let us know if you have any questions about the recent trades; we’re happy to assist.

– Your Titan Team

Disclosures:

As of writing, OpenAI is a 5.07% position in the ARK Venture Fund.

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