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Of course, the primary reason I think everyone is talking about Broadcom stock is because of the big sell-off . So, in part two of this deep dive into Broadcom stock, I'm going to dig deeper into the latest developments that has investors abuzz with the semiconductor stock. So, one of the more interesting developments in the AI ecosystem in the semiconductor industry is that there are relatively few customers that are driving the large percentage of the consumption and the spending on artificial intelligence.
And so, you have the hyperscalers like Microsoft, Amazon, Alphabet, and Microsoft that are spending the bulk of the capital building out these data centers. And then, you have the large language model creators and um uh developers that are the large percentage of the consumption of these computing uh power the computing that's being built.
And those are Anthropic, ChatGPT, and Google's Gemini. And most of these companies are customers for Broadcom. And Broadcom highlights this. They have six core customers. And this creates a situation that there's positives and negatives of having six customers the large majority of your overall revenue.
Number one, you have the customer concentration risk. If only six customers are the primary driver of your overall revenue for your company, if one of those customers or if two of those customers were to leave and join another company and purchase from another company, that's a big, big negative for your company.
So, that's one of the negatives of having just a few customers. And this risk is even more elevated for Broadcom because all of those nearly all of those companies that are the big customers of Broadcom, they're generating their revenue from a concentrated set of factors. And so if one of those factors is to turn significantly negative, let's say consumption of large language models, the tokens that are consumed, if people use large language models less frequently, that's going to impact, you know, three, four, or five of Broadcom's customers.
So that one single factor can cause demand from most of its customers to draw down. So that's the big downside with having relatively few customers. However, there is also an upside. If you have fewer customers, it's easier to manage your business. It lowers the degree of difficulty because you can have conversations with those customers consistently, almost daily, if you want.
It's only six customers. You can have one person be in charge of communicating with those six companies almost on a daily basis. You can have, you know, five individuals or six individuals, one individual allocated to each company, and have conversations with that company consistently. That way you can match demand and supply.
Whatever that customer plans or wants this year, next year, the year after that, the year after that, you can work closely together and match the build and demand of the product for that customer. And that makes it less likely that you create something that your customer doesn't want. That makes it less likely that you overbuild or you build a product your customer doesn't want and you have to offer discounts, etc.
to offload that inventory. So, there are pluses and minuses of this shift in the industry, but the fact remains this is what's going on. And, you know, Broadcom's six core customers, they highlight them, well, they name four of them. Google, Anthropic, OpenAI, and Meta. And then, they don't list the others.
They say the other two customers. All right, so four for sure we know of, Meta, Alphabet, OpenAI, and Anthropic, and these are four of the biggest spenders in the world in terms of artificial intelligence consumption spending money on AI in a little bit of a different way. They're renting their computing power from companies like Microsoft, Microsoft, Alphabet, Amazon, and others, and Oracle and others.
Whereas Meta, Microsoft, Alphabet, and Amazon are building and owning most of those data centers. They're also doing some renting of that computing power, but most of it they're owning. So, Broadcom says that they have significant IP, intellectual property, and execution leadership in XPUs, and networking is key to building scalable XPU and GPU clusters.
Here in networking, we have at least one generation of technology and product leadership. And I would agree with Broadcom here. So, they're very good in XPUs, right? They partner with Alphabet and the companies they highlight earlier to build custom accelerators in case uh and not in case, but to diversify away from Nvidia, right?
All of those companies highlighted earlier that are customers of Broadcom are also customers of Nvidia. I would argue they're spending a lot more with Nvidia than they are with Broadcom, but they will continue spending with Broadcom cuz they don't want to allocate their entire spending with Nvidia. And so they have leadership position.
They're among the leaders in XPUs, an alternative to Nvidia, but where they have a significant lead, where they have best in class, is in the networking, in connecting, in building up and and then in more their competitive advantage is actually more powerful in scaling out. And this is what the builders of AI data centers have been increasingly focused on is building larger and larger clusters because that creates more efficiency in computing spending.
So for for scaling out between racks, they've been shipping the industry's only 100 terabit Ethernet switch, which they call the Tomahawk 6, for over a year. And they will now be taping out their next generation 200 terabit switch this quarter. So they already have a significant lead in this category with their Tomahawk 6 for over a year, and they're preparing their next generation 200 terabit switch in the current quarter, which is likely to extend their leadership position here.
Now, in their networking equipment, most of the customers that purchase the XPUs also purchase the networking equipment along with the XPUs. And some of the customers that don't even purchase their XPUs, some of the customers that purchase Nvidia or AMD or other GPUs still purchase the networking equipment from Broadcom because Broadcom has uh arguably the best networking equipment here with the Tomahawk 6.
So, of course, the more XPUs they sell, the more helpful it'll be for their networking equipment. But, XPU sales are not required for Broadcom to sell their networking equipment as they sell to companies that are not customers of their XPUs, either. So, the company sales are booming, profits are expanding.
They have leadership positions in a critical industry. A lot of good things here from Broadcom management on the latest developments. But, there's more to learn. Click that link for the next part in this deep dive into Broadcom stock.
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