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Magnificent Seven stock Meta Platforms (NASDAQ: META) recently outlined its plans to invest hundreds of billions of dollars on artificial intelligence (AI) data centers.
This is particularly good news for AI semiconductor stock Broadcom (NASDAQ: AVGO).
Meta is one of Broadcom’s main customers for its custom AI chips.
Let’s break down this key piece of news coming from Meta and gain a better understanding of why it adds to the bullish sentiment on Broadcom.
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Zuckerberg Announces Plans for “Titan Cluster” Data Centers
In July 14 posts on Facebook and Threads, Meta’s Chief Executive Officer (CEO) Mark Zuckerberg shed light on the company’s data center plans over the next few years. Zuckerberg stated that Meta is “going to invest hundreds of billions of dollars into compute to build superintelligence." He went on to detail the specific data centers the company is building to effectuate this.
The first is Prometheus, which, according to Fast Company, is an already existing site in Albany, OH. Data center size is typically determined by the amount of power it draws, denoted in gigawatts (GWs). Meta is continuing to add computing power to Prometheus, which Meta expects will allow it to become a more than 1 GW site in 2026.
Then, there’s Hyperion, Meta’s data center that could scale to a whopping 5 GW over the next several years. Hyperion is just one of the multiple “titan clusters” Meta plans to build. A cluster is a large group of connected AI chips that work together to run AI tasks. A visual on Zuckerberg’s post showed the staggering size of these titan clusters. For example, Hyperion would cover a massive portion of Manhattan Island in New York City.
So, what does this all mean for Broadcom?
As Meta’s Data Center Spending Increases, Broadcom Benefits
Broadcom currently has three hyperscale customers for its custom AI chips. Although the company hasn’t confirmed this itself, most generally believe these customers are Google parent company Alphabet (NASDAQ: GOOG), Meta, and ByteDance, the owner of TikTok. Given this, the fact that Meta is adding further details about how big its AI ambitions are is a significant positive for Broadcom.
It shows that demand for its chips from Meta will continue to be strong for years to come. The announcement also adds credence to Broadcom’s serviceable addressable market (SAM) estimates of its three hyperscale customers. Broadcom believes the SAM among these three will be between $60 billion and $90 billion in 2027.
When it comes to Meta, Broadcom may also be able to gain an even larger share of the company’s spending than it has in the past. A big reason this could play out is the firm’s latest Tomahawk Ultra networking chip. Tomahawk Ultra increases the competitive pressure on NVIDIA (NASDAQ: NVDA) in AI networking equipment, which allows AI chips to communicate with each other. NVIDIA’s NVLink products have traditionally dominated this market.
Now, with a viable alternative available, Meta could shift both more AI accelerator and networking spend to Broadcom. This is in light of Broadcom potentially being able to provide a more competitive bundle of AI chips and networking chips.
While Meta’s plans to build massive AI data centers are good for Broadcom's future, they also have secondary effects that are likely to be positive for the company. As Meta continues to ramp up its investments in AI, other leading tech firms will likely need to ramp up their own investments to stay competitive.
This means more investment overall going toward AI, increasing the size of the pie for many players. As the pie grows larger, leaders like Broadcom are likely to take their fair share, increasing the firm’s ability to continue its brisk revenue growth.
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Analysts Remain Solidly Bullish on Broadcom Despite High Valuation Multiple
Although this news is positive for Broadcom and adds potential to the stock, it doesn’t necessarily mean the stock is undervalued.
As of the July 22 close, Broadcom trades at a 38x forward price-to-earnings (P/E) multiple.
That’s just barely below the all-time high forward P/E of 40x the stock reached in December 2024.
Still, Wall Street analysts continue to see upside in shares.
The MarketBeat consensus price target on Broadcom is just over $292, implying around 5% upside versus its July 22 closing price.
Recent price target updates paint an even more bullish picture. Among price targets updated since June 24, their average is nearly $331. That implies shares could rise another 19%.
Written by Leo Miller
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