Apple's $30 billion deal shows life beyond AI Chips

Semiconductor giant Broadcom NASDAQ: AVGO has made a name for itself as one of the leading players in AI chips. The industry behemoth, NVIDIA NASDAQ: NVDAis still far and away the world's largest AI chip company. However, Broadcom's AI sales tower over other top names like Advanced Micro Devices NASDAQ: AMD and Intel NASDAQ: INTC.

Broadcom is more than just an AI chip company. Its latest deal is with tech giant Apple NASDAQ: AAPLwith an expected value of more than 30 billion dollars, clearly shows this.

With this long-term partnership, Broadcom is locking in sales from its most valuable non-AI customer for years to come. Apple is also the world's leading consumer device company, and demonstrates Broadcom's ability to attract global technology leaders.

The deal serves as a reminder that investors shouldn't view Broadcom solely through an AI lens. Although it is heavily tied to AI trading, investors would be remiss not to see its position outside of AI when evaluating the company and its stock.

Apple: Broadcom's Non-AI Chip Engine

To understand the significance of this deal, it's important to understand Broadcom's revenue breakdown. Broadcom reports three key revenue lines: AI Semiconductors, Infrastructure Software, and Non-AI Semiconductors. Its relationship with Apple falls within the non-AI semiconductor segment, with the firm as an anchor customer. Apple has been a long-time Broadcom customer, first using Broadcom chips back in 2009 in the iPhone 3GS.

Although Non-AI Semiconductors is a very small part of Broadcom, it is still a significant source of revenue for the company. At $4.2 billion last quarter, it represented about 19% of its total $22.19 billion in sales.

Previous statements made by Broadcom seem to indicate that the company's Q4 2024 revenue from Apple was close to $2.2 billion. Considering this, it's clear that Apple now represents about half of Broadcom's non-AI chip revenue and 10% of its total revenue.

In this context, the new agreement is important. By extending the deal through 2031, Broadcom secures its key non-AI customer and a major source of long-term revenue.

Notably, this marks the second time in recent years that the companies have extended their partnership, demonstrating Broadcom's ability to retain key customers. In 2023, the companies announced an agreement in which Broadcom will produce 5G radio-frequency components for Apple.

Now, Broadcom and Apple are renewing their radio-frequency chip collaboration. Apple notes, “Broadcom will manufacture advanced radio frequency components—including FBAR filters—and advanced wireless technology at the Fort Collins facility.”

Apple expects the deal to exceed $30 billion, while Broadcom produces more than $15 billion of US-made chips. To support the partnership, Broadcom will invest $1.5 billion to expand and improve its Fort Collins facility. While this is Broadcom's cost, it's worth paying for, which is orders of magnitude.

Beyond AI Chips: Non-AI Semiconductors and Software Are Big Money Drivers

While highlighting Broadcom's relationship with Apple, it's also worth noting the importance of its other major division besides AI chips: Infrastructure Software. The company's infrastructure software business is primarily created by VMware. VMware provides hypervisor software, which allows companies to use computer resources more efficiently.

In its most recent quarter, Broadcom's Infrastructure Software business generated $7.2 billion in revenue, or 32% of its total sales. This helps reinforce the point that investors shouldn't view Broadcom solely as an AI chip company. Combined, the company's non-AI Semiconductor and Infrastructure Software sales came in at $11.4 billion. Therefore, just over half of its total sales come from sources other than AI chips. This helps provide a real level of diversification from AI revenue streams.

Additionally, Broadcom expects non-AI chip revenue and infrastructure software growth to accelerate significantly next quarter. It forecasts non-AI chip growth of 12% year-on-year (YOY), compared to 6% YOY in the previous quarter. Bookings for non-AI chips also reached $6 billion last quarter. Broadcom notes that the higher price than sales is “a clear indication that we are on the way to a full cyclical recovery.” Meanwhile, it sees infrastructure software sales rise 31% YOY, compared to 9% YOY in the previous quarter.

However, with AI Semiconductor's growth expected to increase by more than 200% YOY, up from 143% YOY in the last quarter, the AI ​​Semiconductor segment is certainly the main driver of Broadcom's growth.

As AI contributes a large amount of growth, it will continue to have a significant impact on Broadcom's stock price.

Broadcom Remains Flexible Amid Share Weakness

Overall, Broadcom's deal with Apple solidifies their biggest relationship with one customer. Meanwhile, the company expects all three segments of its business to experience rapid growth in the coming quarter.

With this, the world's second-largest semiconductor company continues to fire on all cylinders, despite shares falling nearly 20% from their highs.

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