Why Broadcom Stock Skyrocketed Monday Morning

Shares of Broadcom (NASDAQ: AVGO) surged higher on Monday, jumping as much as 10.6%. As of 12:38 p.m. ET, the stock was still up 10.2%.

The catalyst that sent the networking specialist higher was word of a new partnership for its custom artificial intelligence (AI) chips.

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A blockbuster deal

In a joint press release that dropped Monday morning, Broadcom and OpenAI announced a strategic partnership to deploy 10 gigawatts of Broadcom's application-specific integrated circuits (ASICs). These AI accelerators, called XPUs, can be customized to handle specific tasks, making them more energy efficient. In some cases, ASICs are being used as a viable alternative to graphics processing units (GPUs) to provide the computational horsepower needed to fuel AI development.

The announcement notes that OpenAI "will design the accelerators and systems, which will be developed and deployed in partnership with Broadcom." The pair also plan to deploy rack systems that incorporate the custom AI chips.

This is the latest in a flurry of deals between OpenAI and high-profile AI chipmakers. In late September, the company announced a 10-gigawatt deal with Nvidia (NASDAQ: NVDA), which included a $100 billion investment in OpenAI. Just weeks later, the AI specialist announced a 6-gigawatt deal with Advanced Micro Devices (NASDAQ: AMD), which included an agreement that gave OpenAI the right to purchase up to 160 million shares of AMD, representing a roughly 10% stake in the company.

By inking deals with all the biggest chipmakers, OpenAI will have a steady stream of cutting-edge AI chips to power its large language models.

In conjunction with its fiscal 2025 third-quarter financial report, Broadcom announced the addition of a fourth large hyperscale customer, which many analysts believed was OpenAI.

This deal helps illustrate Broadcom's growing influence in the AI chip space. Melius Research analyst Ben Reitzes has gone on record saying he believes Broadcom will eventually capture about 30% of the AI chip market.

Yet for all that opportunity, Broadcom stock is attractively priced, with a price/earnings-to-growth (PEG) ratio of 0.38, when any number less than 1 is the standard for an undervalued stock.

Danny Vena has positions in Broadcom and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.