Admittedly, Nvidia remains the benchmark in the semiconductor industry. But competition is growing. One of its strongest rivals is Broadcom. The chip manufacturer is successfully riding the AI wave and - unlike Nvidia - exceeded expectations with its latest outlook. It is therefore not surprising that Broadcom's stock has recently been on the rise. While Nvidia's share price has stagnated over the past six months, the challenger has risen by more than a third. This is despite the fact that Broadcom shares were also unable to escape the general price correction in the semiconductor sector, triggered by the breakthrough of the low-cost AI model "DeepSeek" developed in China.
Even before the Chinese AI model caused the market to wobble, Broadcom pushed open the door to the elite trillionaires' club. Although the market cap is currently below this 13-digit mark again, the Californians still have the smallest "Magnificent 7" member Tesla easily in their pocket. The figures for the first quarter of the current 2024/25 financial year and the outlook for the second quarter provided a recent boost to the share price. First a look at the past figures: In the period from October to January, sales increased by a quarter to a new record of USD 14.9 billion. Growth was driven in particular by AI semiconductor solutions and infrastructure software, with the segments expanding by 77% and 47% respectively. The upward trend on the earnings side was even steeper. Adjusted EBITDA improved by 41% to USD 10.1 billion, resulting in an operating margin of 68%. At the bottom line, the company earned USD 5.5 billion, more than four times as much as in the same period of the previous year. Both sales and profits exceeded analysts' estimates.
The chip specialist also surprised on the upside with its outlook for the second quarter. It is forecasting sales of USD 14.9 billion, whereas the consensus was only USD 14.76 billion. Two thirds of the revenue is expected to remain as EBITDA, which means that the margin will almost reach the level of the first quarter. CEO Hock Tan's confidence is based on continued strong sales in the semiconductor business. It was only in December that Broadcom announced that it was developing customer-specific AI chips with three major cloud providers. A few days ago, the company then reported that it was also working intensively with two other hyperscaler data centers. Broadcom is also working with four other potential customers to develop their own customized AI semiconductors.
It is not only the unbroken demand for ever more powerful chips that plays into Broadcom's hands. More and more customers are also opting for diversification in order to avoid being dependent on just one manufacturer - keyword Nvidia. In addition, the desire for customer-specific semiconductors, known as ASICs in technical jargon, is also increasing. Application-specific integrated circuits have a bright future ahead of them. Morgan Stanley forecasts that the AI ASIC market will grow from USD 12 billion in 2024 to USD 30 billion in 2027, representing a compound annual growth rate of a whopping 34%.
Investors can turn the current bottoming out below the USD 200 mark, which is flanked by the 200-day moving average, into positive returns with yield enhancement products. For example, the recent sharp rise in volatility is creating attractive conditions for barrier reverse convertibles (BRC). Leonteq has launched two new soft-callable BRCs with a maximum term of 18 months. The structures promise double-digit percentage returns even in the event of price stagnation or even further moderate setbacks. In contrast to the conventional BRC, the interest payment on these two securities is not guaranteed. In order to receive the coupon on a pro rata basis, the Broadcom share must be above the coupon trigger level on the quarterly observation dates. However, this hurdle is relatively modest; the threshold is 50% of the initial level. If the coupon payment is nevertheless not made on a key date, it is not lost at the same time. Due to the memory function, the payment can be made up for if the underlying instrument rises above the coupon trigger level again on one of the following observation dates. If the barrier is breached, the final fixing determines the return. If Broadcom is then below the strike level, losses may be incurred. If, on the other hand, the chip stock is quoted at or above the strike at maturity, Leonteq will repay the full nominal amount.
The products, which are offered in the two currency tranches CHF and USD, each have a risk buffer of a comfortable 45%. The coupons amount to an attractive 11.40% p.a. for the CHF variant and even 16.00% p.a. for the USD product. The term can be shortened due to the built-in soft callable function. Every three months, but at the earliest after 6 months, the issuer has the right to early redemption at 100% for both BRCs.
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