Broadcom CEO says AI growth capped by power, not chips

Broadcom ↗ 2.98% CEO Hock Tan laid out the company's most detailed AI growth trajectory yet at the Goldman Sachs ↘ 0.20% Communacopia + Technology Conference on Tuesday, projecting AI revenue of $115 billion in fiscal 2027 and $230 billion in fiscal 2028 — figures he described as "extraordinary" but constrained by supply rather than demand.finance.yahoo

The projections, first disclosed during Broadcom's Q3 fiscal 2026 earnings call on September 2, represent a doubling of AI revenue in each of the next two fiscal years, up from roughly $58 billion expected for fiscal 2026.investing+1

Custom Chips and Physical Limits

Tan told the audience that the binding constraint on AI growth is not semiconductor supply but rather physical infrastructure — power-ready data center sites, permitting and construction timelines. "If you want to make it power ready, say, in 2028, got to start construction on the sites now," he said.investing

Broadcom's AI business centers on custom accelerators, called XPUs, built in close collaboration with six frontier model developers. Tan pointed to his company's work with OpenAI, noting that the two produced a chip known as Jalapeño within roughly a year and that it "performs as well, if not better, than the best state-of-the-art general-purpose accelerator." Broadcom is now working on two subsequent generations.finance.yahoo+1

He also highlighted Broadcom's long-standing partnership with Google Alphabet Inc. ↗ 0.02%, which stretches back more than a decade to the first version of Google's tensor processing unit. The two companies signed a long-term agreement in April covering TPUs and networking products through 2031.investing

Where the Value Lands

Tan argued that economic value in AI will concentrate among developers of the most capable frontier models rather than spreading evenly across the supply chain. Using an illustrative example, he said one gigawatt of frontier-model compute capacity could generate roughly $30 billion in annual recurring revenue against about $10 billion in operating costs, leaving the bulk of the margin with model developers and their applications.finance.yahoo+1

He offered a broader market snapshot: global token-generation infrastructure costs about $200 billion a year, while model-related revenue totals about $150 billion. Closed frontier models account for at least 75 percent of that revenue despite generating roughly half the tokens, Tan said, calling into question the long-term economics of open-weight alternatives.investing

Cash Piles and Capital Decisions

Broadcom expects to end fiscal 2026 with a record cash balance and generate free cash flow in the mid-$40 billions in fiscal 2027. The company carries about $56 billion in debt, which Tan said was issued when interest rates were lower, making early repayment unattractive. He said the board will review capital allocation at its December meeting, with dividend increases and share buybacks the most likely options.finance.yahoo+1

"We're going to generate a lot of cash. More so in 2028," Tan said.investing