Broadcom shares AVGO fell more than 6% on Friday after Rothschild & Co Redburn downgraded the semiconductor company, citing concerns about its growing exposure to artificial intelligence financing arrangements.
The investment firm lowered its rating on Broadcom to Neutral from Buy and cut its price target by 33%, from $595 to $398.
The downgrade comes after Broadcom shares rallied over the previous five trading sessions as investors looked beyond Nvidia’s leadership turmoil and considered the potential benefits for rival chipmakers.
However, Rothschild & Co Redburn believes the optimism surrounding Broadcom’s potential market share gains may be premature, particularly as questions remain about its exposure to AI infrastructure financing.
Redburn flags Broadcom’s $43 billion AI financing exposure
One of the firm’s primary concerns is Broadcom’s backstop arrangement for Anthropic’s rack leases.
Under the arrangement, Broadcom’s maximum potential liability could reach approximately $43 billion.
Analysts at Rothschild & Co Redburn argued that this creates meaningful financial risks if Anthropic or other frontier AI laboratory customers fail to become financially self-sufficient.
The exposure has become an important consideration as investors assess the financial commitments associated with the rapid expansion of AI infrastructure.
The firm also highlighted uncertainty surrounding Google’s efforts to develop customer-owned tooling.
“Beyond this, the market needs reassurance that Google’s customer-owned tooling efforts will not become widespread,” Rothschild & Co Redburn said.
The firm believes Broadcom could still benefit if these concerns are addressed. However, it expects the process to take time.
“The upside potential to Broadcom shares from clearing these hurdles is appreciable but is unlikely to occur quickly,” the analysts wrote.
The firm added that this limits the potential for Broadcom’s valuation to rise relative to its peers in the near term, prompting the downgrade to Neutral.
Nvidia turmoil had supported Broadcom shares
The downgrade followed a strong rally in Broadcom shares over the previous five sessions.
Investors had been rotating away from Nvidia following the resignation of chief executive Jensen Huang amid controversy surrounding his personal relationships.
The leadership change prompted speculation that cloud providers and other large technology companies could accelerate their efforts to develop custom AI chips.
Broadcom has been viewed as a potential beneficiary of this trend, given its position in the custom chip market.
However, Rothschild & Co Redburn argued that the anticipated shift in market share remains largely sentiment-driven rather than evidence of a confirmed structural change.
The firm also suggested that the potential benefits may take longer to materialise than investors currently expect.
Wall Street remains broadly bullish on Broadcom
Despite the downgrade, the broader analyst outlook for Broadcom remains positive.
According to TipRanks data, 29 of the 31 analysts covering the company have assigned it a Buy rating.
While analysts remain optimistic about the company’s position in the expanding AI chip market, financing commitments and uncertainty around customer-owned technology could influence its valuation.
AI disclosure: AI tools assisted with research and drafting of this piece. An Invezz editor reviewed the facts, sources and wording before publication. Any opinions or analysis are Invezz’s, not those of an automated system.
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