Goldman Sachs Group, Inc.: Broadcom Inc. (AVGO.US) is considered the most important "arms dealer" in the AI craze, but the market expects the entry barrier to be "extremely high".

Broadcom Inc. (AVGO.US) stock price has risen by over 66% so far this year, pushing its market value towards $2 trillion. Goldman Sachs Group, Inc. analyst James Schneider has just raised the target price for the stock and reiterated a buy rating. He believes that Broadcom Inc. may be one of the most important "arms dealers" in the artificial intelligence boom. However, with this momentum comes a new pressure. He also explicitly stated that the market's expectations for the fourth quarter are still very high. Investors hope that the company's performance will significantly exceed expectations and raise its performance guidance, with AI sales needing to exceed $11 billion. Therefore, while Broadcom Inc. may be winning in the AI hardware race, Goldman Sachs Group, Inc.'s report highlights future challenges, as even strong performance may disappoint when the stock price is rising so rapidly. Betting on Broadcom Inc.'s AI engine Schneider raised Broadcom Inc.'s target price from $380 to $435, as Broadcom Inc. heads into the fourth quarter with strong momentum that cannot be ignored. He discussed the three areas of most concern to investors in his report. These include the company's expectations for AI revenue in 2026, the sales contributions of Alphabet Inc. Class C and OpenAI, and whether the company can maintain its high profit margins as its custom XPU business continues to grow at an impressive rate. Additionally, Schneider mentioned that expectations remain high, especially considering the strong performances of peers, particularly Alphabet Inc. Class C's latest release Gemini 3, which heavily features Broadcom Inc.-designed TPUs. It is worth mentioning that with the rise in Broadcom Inc.'s stock price, the current P/E ratio is over 28 times and the P/S ratio is over 55 times. However, Goldman Sachs Group, Inc. believes that Broadcom Inc. is one of the few companies that are benefiting from the AI hype, rather than being one of the few companies building hardware foundations on which other companies depend to survive. Market expectations for Broadcom Inc. As Broadcom Inc. enters the fourth quarter, the market expects its performance to continue to grow steadily, mainly due to the rapid growth of its AI semiconductor business. General expectations show earnings per share of around $1.87 and revenue of $17 billion to $17.4 billion. Broadcom Inc. itself gave revenue guidance of $17.4 billion, close to the upper end of this range. The company's AI chip business is its most important growth driver, with fourth quarter revenue expected to reach $6.2 billion, a 66% year-on-year increase accounting for over one-third of total sales. Infrastructure software, led by VMware, is also expected to increase to $6.7 billion, a growth rate of up to 15%. In addition, with a record $110 billion backlog and the disclosure of orders exceeding $10 billion from a "fourth major AI customer," investors believe that the strong growth momentum will continue into next year. Broadcom Inc.'s AI story is about how it quietly built the engineering infrastructure of enterprises, effectively defining the landscape of the AI competition. At its core are Alphabet Inc. Class C and OpenAI, both of which are large-scale data center companies that have chosen Broadcom Inc. as their preferred ASIC design partner for developing custom AI accelerators (known as XPUs). From this perspective, these powerful new chips currently account for a remarkable 65% of the company's AI product sales. Alphabet Inc. Class C plays a crucial role in this expansion. Broadcom Inc. is the silicon chip partner powering the new Gemini models, responsible for the design and production of these chips, and has introduced chips featuring new tensor processing units (TPUs). Reports suggest that, given Broadcom Inc.'s role as a leading TPU contractor, Meta Platforms may adopt Alphabet Inc. Class C's TPU design in 2026-2027, bringing new momentum for its development. OpenAI adds a second catalyst. The company is reportedly collaborating with Broadcom Inc. to develop high-performance custom accelerators, making OpenAI a key contributor starting in the 2026 fiscal year. Investors seem to still not fully realize the extent to which Broadcom Inc.'s future depends on whether Alphabet Inc. Class C and OpenAI can accelerate the development of custom chips. If the development of these two companies exceeds expectations, Broadcom Inc. may quietly capture a significant share of the AI market from NVIDIA Corporation.