Broadcom (AVGO) just signed on to perhaps the biggest AI infrastructure push in recent memory. 

On October 13, OpenAI and Broadcom announced a mind-boggling new deal that has them co-developing and co-deploying a 10-gigawatt fleet of custom accelerator racks, starting in late 2026 and continuing through 2029.

That’s a far from standard chip order. 

The deal involves long-haul infrastructure, including custom chips, Ethernet fabrics, and power-hungry racks tailor-made for handling AI compute. Broadcom’s role runs deep, and the stakes have only gotten bigger.

Key facts on OpenAI-Broadcom deal:

  • Rack rollouts are expected to be phased out and milestone-based, rather than a single mega-shipment.
  • Broadcom’s accelerators will link up with its powerful Ethernet switches and optics.
  • Delivery is linked to packaging capacity, fab supply, and site-level power.

Wall Street clearly took notice, with Broadcom stock jumping almost 10% on the announcement of the deal. 

Now, Morgan Stanley just revamped its target on AVGO stock, but its bullish note comes with a catch. The firm’s model introduces a twist that can potentially temper investors’ expectations for the upside to materialize. 

Morgan Stanley’s latest call gives Broadcom a lift, but with a careful eye on how its OpenAI deal plays out.

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Morgan Stanley raises Broadcom target but throws in a grain of salt

Morgan Stanley is bullish on Broadcom’s OpenAI deal, but it isn’t exactly buying the hype wholesale.

In a new note, analysts bumped their price target on AVGO to $409 from $382 while maintaining an overweight rating, hailing the power-packed collaboration with OpenAI “a clear positive” for long-term AI visibility. Still, Morgan Stanley is taking “the scale with a grain of salt.”

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The firm acknowledges that the potential topline numbers may excite, but it’s also imperative to avoid stacking expectations too high, since the plan is “clearly distinct” from the unnamed customer mentioned during Broadcom’s earnings call.

Accordingly, Morgan Stanley is looking to avoid double-counting demand, which the Street initially incorporated into models.

Morgan Stanley is aiming to keep the models clean and avoid double-counting, even as it raises its 2027 AI data-center sales outlook by roughly $8 billion to a substantial $73.2 billion.

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The firm still sees a “constructive” path ahead. 

AVGO’s upside story isn’t linked to just one megadeal, and there’s plenty of depth in its broader funnel, including custom accelerator ASICs, Ethernet switches, and optics, positioning it to benefit across multiple layers of infrastructure.

Quick takeaways:

  • Morgan Stanley lifted Broadcom’s price target to $409 but is taking the OpenAI deal projections “with a grain of salt.”
  • The new 10-gigawatt AI rack plan is separate from the “new customer” mentioned on Broadcom’s earnings call.
  • AVGO’s AI upside is diversified, with growth expected from custom accelerator chips and Ethernet components, rather than relying on a single big-ticket deal.

Broadcom’s AI buildout finally hit the bottom line

Broadcom stepped up its game this year in AI, earnings, and investor returns. While many of its peers chased AI headlines, Broadcom built the hardware stack to make it all work, delivering the chips and networking gear that’s critical in running AI at scale.

That foundation paid off immensely.

AI sales jumped 77% year-over-year in Q1 to about $4.1 billion. In Q2, it grew 46% to more than $4.4 billion. By Q3, Broadcom’s total sales jumped to a whopping $15.95 billion, up 22% from last year, with its adjusted EBITDA coming in at $10.7 billion, or 67% of sales.

Management expects AI semiconductor sales to reach nearly $6.2 billion in Q4, a massive 66% jump, which marks 11 consecutive quarters of AI growth.

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Broadcom’s product lineup also leveled up in a big way.

It recently launched the Thor Ultra, an 800G Ethernet NIC (network interface card) that’s custom-built for AI, and the Tomahawk 6 “Davisson,” a lightning-fast 102.4-Tbps Ethernet switch, along with co-packaged optics cutting power and improving reliability in heavy AI data flows.

Additionally, its software side (primarily VMware) transitioned to subscriptions, laying the foundation for long-term recurring sales, even as legal disputes persisted in Europe over the VMware merger.

Meanwhile, Broadcom handsomely rewarded its shareholders with a $10 billion stock buyback, approved through the end of 2025, and announced a dividend per share of $0.59 in Q3.

All that momentum helped take AVGO stock up by nearly 50% year-to-date by mid-October, and almost 90% in the past six months alone.

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