Broadcom's Takes on NVIDIA: Why Tomahawk Ultra Could Boost Shares

Shares of AI semiconductor behemoth Broadcom (NASDAQ: AVGO) got a solid boost on July 15 as the company made a key announcement regarding its latest innovation, Tomahawk Ultra. Broadcom says it has begun shipping the new networking chip that is specifically designed for AI and high-performance computing workloads.

Shares rose by 2% on the day of this announcement, leading the stock to a new all-time closing high.

Another likely contributor to Broadcom’s bullish move was an announcement from NVIDIA (NASDAQ: NVDA). The company said it hopes to start delivering its H20 chips to China again soon, and the U.S. government assured NVIDIA that it will grant the licenses it needs to do so.

This represents a notable shift in U.S. chip policy and bolsters NVIDIA’s sales potential. It could also be positive for Broadcom, which does business with China. Let’s break down these key news pieces and what they mean for the tech stock going forward.

Tomahawk Ultra: Broadcom’s Bid To Take Networking Customers From NVIDIA

Broadcom’s Tomahawk chips play a crucial role in data centers; they help manage the flow of data between AI accelerator chips. The industry knows the Tomahawk family as networking chips, as they handle data traffic between connected devices. Improving AI accelerators is key to making better AI models.

The same goes for networking chips. If advancements in networking chips don’t keep up, they can bottleneck performance gains from AI accelerator improvements. Thus, creating better networking chips is a significant business opportunity for Broadcom as the prevalence of AI grows.

Low-latency networking chips are essential in training AI models as they allow for faster data transmission. NVIDIA has dominated low-latency networking chips with its NVLink products. However, with Tomahawk Ultra, Broadcom positions itself to compete directly against NVLink.

This is because Tomahawk Ultra provides much lower latency than Broadcom’s past networking chips.

Broadcom now claims that Tomahawk Ultra offers lower latency than NVLink. However, analysts assert they will need to see the product in real-world action to determine if this is true. Broadcom also says that Tomahawk Ultra can connect four times as many AI accelerators as NVLink, which is key for scaling up AI workloads and boosting performance.

Overall, Broadcom now has a significant opportunity to take market share from NVIDIA in networking chips. Doing so could add notable juice to the firm’s sales going forward and influence further share appreciation.

What NVIDIA’s Resumption of China Chip Sales Means for Broadcom

NVIDIA’s ability to sell its H20 chips to China again shows that the U.S. government is scaling back its efforts to restrict advanced chip sales to China. This could be a positive for Broadcom, considering that one of its big customers is a Chinese company.

That company is ByteDance, the owner of TikTok. The two firms have been collaborating to make custom AI chips. It is unclear to what extent U.S. government chip restrictions have impacted Broadcom’s relationship with ByteDance.

Still, with the U.S. government clearly softening its stance, the relationship between the two companies is likely to improve. This means that Broadcom’s potential to receive future orders from ByteDance grows.

This can add upside to Broadcom’s future revenues. Broadcom could also now start to engage more seriously with other Chinese companies interested in its chips.

China is no small market. Due to past restrictions, NVIDIA expects a negative impact of $8 billion on its sales this quarter alone. Thus, the general easing of restrictions means that Broadcom could now better capitalize on the multi-billion-dollar opportunity in the country. Notably, analysts at Mizuho lifted their price target on Broadcom from $315 to $320 on July 16. Mizuho’s latest target implies an upside potential of approximately 14% compared to Broadcom’s July 16 closing price.

Pathways for Growth Expand, Adding to the Potential of AVGO Shares

Through Tomahawk Ultra and fading China restrictions, Broadcom’s business potential continues to grow. This is vital for the stock, which is trading near its all-time high. These developments could help Broadcom outperform expectations in the coming quarters and lead shares higher.

Still, the upside in these new growth pathways could take time to materialize. It will be interesting to see what color Broadcom adds around Tomahawk Ultra and China in future earnings calls.

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The article "Broadcom’s Takes on NVIDIA: Why Tomahawk Ultra Could Boost Shares" first appeared on MarketBeat.