Broadcom Faces Potential Margin Headwinds as Big-Name Clients Consider In-House silicon

A renewed wave of skepticism surrounds Broadcom as AI enthusiasm wanes and analysts flag risk from its major customers taking more chip development in-house. The concerns center on how Google and Meta, among others, could curb Broadcom’s long-term margins if they internalize custom silicon work.

DA Davidson weighs in as the responsible party for the cautious tone, issuing a Neutral rating on Broadcom with a price target of 335 US dollars. The core of their analysis hinges on Broadcom’s Custom Silicon business. The firm paints a “melting iceberg” picture: while Broadcom currently benefits from massive revenue streams with hyperscale partners, the risk is that these corporations move development in-house to cut costs and reduce reliance over time.

This stance runs counter to the prevailing sentiment in the market, which has been buoyed by AI excitement. In recent days, Wolfe Research elevated Broadcom to Outperform, highlighting a strong pipeline for Google’s Tensor Processing Units (TPUs) and the potential for these chips to be opened to third-party developers. Separately, UBS recently reiterated a Buy rating, projecting robust demand for AI networking equipment and accelerators through at least 2027.

Even as the bespoke chip business draws scrutiny, Broadcom’s traditional networking unit is viewed as a stabilizing force. The company has recently expanded its lineup with the BCM49438 processor and the Trident X3+ switch, bringing data-center technologies into enterprise networks.

Should investors sell immediately? Or is it worth buying Broadcom?

Industry observers acknowledge Broadcom’s dominance in switching and routing as a durable franchise. This technology is essential for moving data across thousands of AI GPUs and is perceived as far less susceptible to the internalization plans of large tech firms than pure compute offerings.

The Investment Equation: Near-Term Need vs. Long-Term Risk

For investors, a clear dichotomy emerges. In the near term, Broadcom’s networking capabilities appear indispensable to scaling AI infrastructure. Yet over a three- to five-year horizon, the risk that large customers like Meta push for greater independence grows. The stock’s trajectory will hinge on whether growth in the networking segment can offset potential declines in the Custom Silicon segment.

In summary, Broadcom’s path forward will largely depend on how its core networking business evolves relative to any waning momentum in bespoke silicon, as major customers reassess how much of their development they want to keep in-house.