Broadcom’s AI Business Is Booming, But Alphabet’s Strategy Highlights 2 Key Risks

Despite Broadcom expecting its AI semiconductor sales to nearly quadruple over its next two fiscal years to $230 billion, the stock’s outlook faces risks.

The firm expects Anthropic to become its largest XPU customer next year and OpenAI its second-largest by fiscal year 2028 (FY2028). While growing demand from both companies is driving this shift, another factor is less encouraging: Alphabet is diversifying its tensor processing unit (TPU) suppliers, potentially reducing its reliance on Broadcom.

Broadcom has now confirmed that another chip design company will be a part of Alphabet’s TPU development, taking market share in a program that Broadcom has long dominated. Related to this is the customer-owned tooling (COT) threat, in which Broadcom’s customers or potential customers take on more of the work Broadcom currently performs.

Alphabet’s TPU Strategy Is Reducing Broadcom’s Share of a Growing Market

In its latest earnings call, Broadcom noted that MediaTek is Alphabet’s development partner for the training-optimized TPU 8t. Meanwhile, Broadcom is Alphabet’s development partner for the inference-optimized TPU 8i. This validates recent rumors around Broadcom losing share in Alphabet’s TPU program to MediaTek.

Amid this, analysts expect Broadcom’s share in Alphabet’s TPU program, where it was essentially the only partner for years, to decline significantly. Macquarie estimates Broadcom’s share will fall from 95% in 2026 to 80% in 2027 and to 65% in 2028. However, this would also be a smaller portion of a rapidly expanding pie. Piper Sandler estimates that overall TPU shipments will hit 8.8 million in 2027, compared to 2.85 million in 2025 and 4.5 million in 2026.

Furthermore, Broadcom may be in an advantageous position compared to MediaTek, due to designing the 8i versus the 8t. McKinsey projects that demand for inference will increase at a 35% compound annual growth rate (CAGR) from 2025 to 2030, significantly exceeding training’s 22% CAGR. In turn, 8i shipments could expand faster than 8t shipments. Together, these factors align with Broadcom’s expectation that its relationship with Alphabet will continue to grow.

The Customer-Owned Tooling Threat

Customer-owned tooling (COT) is another risk to monitor. COT describes custom chip users handling more of the design process and manufacturing logistics themselves rather than outsourcing to partners like Broadcom.

Alphabet’s partnership with MediaTek provides some evidence of a COT transition at play. Counterpoint Research believes that Alphabet is bringing its compute die design and high-bandwidth memory procurement in-house for the 8t, while MediaTek provides the input/output (I/O) die designs.

Still, Broadcom has a long-term TPU development agreement with Alphabet and expects “growing demand in ’28 and ’29 to be fulfilled through successive generations of the increasingly complex TPUs we are developing today with Alphabet.” This suggests that Alphabet is not moving to a full COT model in the near future.

Broadcom also says it is already working on the next two generations of OpenAI’s Jalapeño chip, limiting the near-term risk of OpenAI adopting a COT strategy. Additionally, Broadcom’s partnership with Meta Platforms extends through 2029, with Meta noting its ability to ship a new chip roughly every six months. This long-term agreement could also limit COT risk, as it is questionable whether Meta could sustain this strong release cadence without Broadcom by its side.

OpenAI and Anthropic Could Offset Alphabet’s Transition

Further reducing the risks of Alphabet’s TPU diversification and COT strategy is Broadcom’s expectation that Anthropic and OpenAI will become its largest XPU customers. Broadcom says that with an expected deployment of 5 GW for Anthropic, the firm is on track to become its largest XPU customer next year.

Meanwhile, in FY2028, it expects to deploy 5 GW of OpenAI’s Jalapeno, making the firm its second-largest XPU customer. Broadcom also has line of sight to add an incremental 10 GW just for Anthropic in FY2028, allowing Anthropic to sustain its position as Broadcom’s largest customer. These deployments will be critical to Broadcom achieving its guidance of $230 billion in AI chip sales in FY2028, which implies a near quadrupling of this business versus fiscal year 2026.

Broadcom Expected to Remain the Custom Chip Design Partner Leader

Counterpoint Research projects that Broadcom will lose minimal AI custom chip design partner market share from 2024 to 2027, with its shipment share dropping from 64% to 60%. Despite this, it projects the entire market will grow by three times in that period, more than outweighing Broadcom’s relatively small share loss.

Still, a subsequent Counterpoint forecast suggests MediaTek’s share will increase from 14% to 26% from 2027 to 2028. This gain is likely to come at Broadcom’s expense, as MediaTek’s growth will largely come from Alphabet. Nonetheless, Counterpoint expects Broadcom to maintain its position as the largest player.

Broadcom has established itself as the prime beneficiary of the shift toward custom silicon, holding a dominant share of this rapidly expanding market. However, Alphabet’s diversification and COT strategy show that competition is on the rise, not only from other ASIC vendors, but also from hyperscalers themselves. While these are real risks to Broadcom’s business, its opportunities for growth are also plentiful.

Original Post