2025: A Pivotal Year for Tech Spending and Investment Opportunities

Big tech companies are preparing for significant capital expenditures next year. Together, four of the largest firms plan to spend $320 billion in 2025, with a strong emphasis on enhancing artificial intelligence (AI) data centers for both training and deployment of generative AI.

Nvidia (NASDAQ: NVDA) is poised to benefit significantly from this spending surge. Companies like Meta Platforms and Google parent Alphabet have reiterated their reliance on Nvidia’s advanced graphics processing units (GPUs). Interestingly, their executives hinted at promising prospects for another chip company as well.

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Broadcom (NASDAQ: AVGO) stands to gain from the anticipated uptick in tech spending in 2025 and beyond. Insights from Meta and Google suggest a robust future for Broadcom, making it a potential focus for investors.

Image source: Getty Images.

Emergence of Custom Chips

Broadcom produces various semiconductors, playing a crucial role in AI data centers. It manufactures chips for network switches that help ensure fast data transfer among servers. These chips enable Nvidia’s technology to operate efficiently in data centers run by Meta and Google.

Broadcom also provides other chips utilized by these companies, including technology for Meta’s custom AI chip, the Meta Training and Inference Accelerator (MTIA).

Since 2015, Google has collaborated with Broadcom to develop its Tensor Processing Unit (TPU). Both Meta and Google shared positive updates regarding their custom chip initiatives during recent earnings calls.

Meta CFO Susan Li noted, “In 2024, we started deploying MTIA to our ranking and recommendation influence workloads for ads and organic content. We expect to further ramp adoption of MTIA for these use cases throughout 2025.”

Looking to the long term, Meta envisions increasing the use of its AI chips to gradually replace Nvidia’s GPUs in its centers. Li added, “Next year, we’re hoping to expand MTIA to support some of our core AI training workloads, and over time, some of our GenAI use cases.”

Similarly, Alphabet CEO Sundar Pichai acknowledged that “We saw strong uptake of Trillium, our sixth-generation TPU” during the fourth quarter. The TPUs were only recently released to the public, suggesting that 2025 could see significant growth for these chips.

Custom AI accelerator chips notably outperform traditional GPUs for various AI tasks. As technology companies expand their data centers, even small efficiencies can lead to considerable financial benefits. Therefore, enhancing custom chip applications and maintaining control of the technology infrastructure become essential as capital expenditures grow.

Broadcom’s Long-Term Outlook

Broadcom’s partnerships extend beyond Alphabet and Meta; TikTok’s parent company, ByteDance, is one of its three largest customers. Broadcom’s management revealed during their earnings call the onboarding of two new customers developing next-gen chips, with speculation hinting at Apple and OpenAI.

Apple has shown a clear interest in Broadcom’s chips and utilized Google’s former TPUs in training its Apple Intelligence system last year. Should Apple aim to control more of its AI development, it could emerge as one of Broadcom’s biggest clients.

Broadcom forecasts the market for custom AI accelerators will soar to between $60 billion and $90 billion in the next three years. In the previous year, Broadcom held approximately 70% of the custom AI accelerator market, raking in about $12 billion in revenue.

For context, Broadcom’s overall sales were about $51.6 billion in 2024, meaning that growth within AI chips could potentially double its revenue if maintained.

However, with a promising outlook, it’s important to note that valuation still plays a critical role. Currently, Broadcom’s stock trades at 37 times its upcoming earnings. Although strong profitability is expected, this premium price raises concerns for potential investors.

Should the stock’s valuation adjust closer to 30 times 2025 earnings, it may present a buying opportunity, especially as analysts predict earnings growth exceeding 30% this year, resulting in a price/earnings-to-growth ratio around 1. If demand for Broadcom’s custom chips exceeds expectations as Meta and Google expand their use, the valuation could be justified.

In conclusion, Broadcom represents a compelling option for investors interested in the AI industry’s growth. However, at present, its stock appears too costly to recommend.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Alphabet and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.