Key Highlights

● AVGO shares rose 2.08% to $362.51 on Monday, October 5, on Volume of 21.48 million shares, almost exactly its normal level.

● Broadcom has agreed to lend Anthropic up to $42 billion in convertible notes, covering roughly a third of a $125.2 billion, five-year commitment to Lease tensor processing unit capacity.

● Fiscal third-quarter Revenue rose 86% to $29.6 billion, with AI semiconductor revenue up 221% to $16.7 billion.

● Broadcom expects fourth-quarter revenue of about $34.8 billion, with AI semiconductor revenue of about $21.7 billion.

Broadcom (NASDAQ:AVGO) stayed among the most heavily traded US stocks on Monday as a broad technology rally ran alongside an unusual piece of news that investors are still digesting: a financing arrangement of up to $42 billion with AI developer Anthropic. Broadcom shares rose 2.08% to $362.51 on volume of 21.48 million shares, almost exactly its normal level, for about $7.79 billion in dollar volume. That placed the chip and software company 14th on the list of the most active US stocks by dollar volume.

What's driving the volume

The Anthropic arrangement came to light on October 1, when details emerged from Anthropic's IPO prospectus. According to the filing, Broadcom has agreed to lend Anthropic up to $42 billion in the form of convertible notes, which could ultimately be exchanged for Anthropic shares. Broadcom may designate a financing partner, and Anthropic said it did not expect the notes to be sold before its IPO is completed.

The money is tied to computing capacity: it would cover roughly a third of a $125.2 billion, five-year commitment Anthropic has made to lease tensor processing unit capacity, the AI chips Broadcom co-designs with Google (NASDAQ:GOOGL). Anthropic is expected to become Broadcom's largest compute customer in 2027, and the filing flagged potential conflicts of interest given that Broadcom will be a lender, supplier and partner at the same time.

Broadcom stock rose about 3.35% to $355.14 after the report, and Monday's gain extended that move. The broader market helped. The Nasdaq Composite climbed 1.05%, Nvidia (NASDAQ:NVDA) rose 2.12%, and technology momentum carried the index higher even as the 10-year Treasury Yield rose to 5.31%, its highest level since 2002. Softer-than-expected jobs data reduced expectations for further Federal Reserve rate increases, which supported growth stocks.

The deal has also drawn criticism. Coverage of the filing described it as the latest example of circular financing in the AI industry, in which chip and cloud suppliers fund AI developers that then spend the money on those suppliers' products. Nvidia and AMD (NASDAQ:AMD) have struck arrangements with AI customers that critics view in a similar light. The concern is that such structures can inflate reported Demand and concentrate risk, so that trouble at one heavily funded customer could ripple through the suppliers that financed it.

Anthropic has comparable relationships with large cloud backers such as Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT). Supporters counter that the financing secures years of demand for Broadcom-designed chips from one of the fastest-growing buyers of AI computing, and that the convertible structure gives Broadcom a potential Equity stake in that growth. Monday's normal relative volume suggests investors were repositioning steadily rather than reacting to anything new.

The business

Broadcom is two businesses under one roof. Its semiconductor division designs custom AI accelerators for large cloud and AI companies, most prominently the TPUs it develops with Google, along with Ethernet switching and networking chips that connect thousands of processors inside AI data centers. It also sells broadband, wireless and storage chips. Its infrastructure software division, built largely through acquisitions including VMware, sells virtualization, mainframe and security software on subscription. In the most recent quarter, semiconductors made up about 70% of revenue and software about 30%. In April, Anthropic, Broadcom and Google announced a collaboration under which Google would Supply TPU capacity to Anthropic beginning in 2027, which underpins the new lease commitment.

Recent results and guidance

Broadcom's fiscal third-quarter report, released September 2, showed AI demand accelerating sharply. Revenue rose 86% from a year earlier to $29.6 billion. AI semiconductor revenue jumped 221% to $16.7 billion, up 54% from the prior quarter. Semiconductor solutions brought in $20.8 billion and infrastructure software $8.8 billion. Adjusted Earnings were $3.32 per share, GAAP earnings were $2.68, and free Cash Flow reached a record $13.7 billion, or 46% of revenue.

The company ended the quarter with $24 billion in cash and declared a quarterly Dividend of $0.65 per share, which works out to an annual yield of roughly 0.7% at Monday's price. Operating Cash Flow was $14.2 billion against Capital spending of only about $0.5 billion, underscoring how little Broadcom needs to invest in factories compared with chipmakers that run their own fabrication plants.

Guidance was even stronger. Broadcom expects fourth-quarter revenue of about $34.8 billion, up 93% from a year earlier, with AI semiconductor revenue of about $21.7 billion, up 236%. Chief Executive Hock Tan said demand for the company's custom AI accelerators and networking products remains very strong.

Valuation

Broadcom trades at about 46 times trailing earnings of $7.83 per share, according to market data. That is a premium to Nvidia at about 30 times and to Micron (NASDAQ:MU) at about 14 times, but far below AMD's roughly 162 times trailing GAAP earnings. Trailing figures understate Broadcom's earnings power if fourth-quarter guidance is met, since revenue is growing at close to 90% a year. The stock also remains well below its 52-week high of about $495, even after recent gains, which suggests investors have been more cautious on the name than the growth numbers alone would imply. Analysts remain bullish, and the consensus rating is Strong Buy.

Bull case

● AI revenue is growing at more than 200% a year, and guidance points to further acceleration in the fourth quarter.

● The Anthropic commitment adds a large, multi-year customer on top of Google and other custom chip clients.

● Free cash flow of nearly half of revenue funds dividends and gives Broadcom financial flexibility.

Bear case

● Lending to a customer that then buys Broadcom-designed capacity raises questions about the quality of future revenue and adds Credit risk.

● Revenue is increasingly concentrated in a small number of very large AI customers.

● Higher long-term interest rates could pressure the valuations of richly priced AI stocks.

Anthropic's IPO and Broadcom's convertible notes

Investors will watch the progress of Anthropic's IPO, which could value the AI developer at about $2 trillion and would shape how the convertible notes perform. Any further disclosure from Broadcom on how it will fund or syndicate the lending commitment, and whether it designates a financing partner, will matter. Broadcom's fiscal fourth-quarter results, expected in December, will show whether AI revenue reaches the guided $21.7 billion. The broader AI trade, from Nvidia and AMD results to the path of Treasury yields, is the backdrop for the stock.