AVGO Stock Drops After Financing Deal With OpenAI For Custom Chips Hits Snag: Report

• Codenamed ‘Project Nexus,’ the deal aims to produce a custom inference chip called ‘Jalapeno’ to power ChatGPT. 
• The project is currently stalled over an $18 billion financing requirement for its first phase, as per a media report.  
• AVGO requires Microsoft to buy atleast 40% of the chips for the deal to go through.

Broadcom (AVGO) shares dropped 3% on Thursday amid a media report that its ambitious plan to develop bespoke artificial intelligence hardware along with OpenAI has hit a significant financing roadblock. 

The companies are negotiating an agreement for Broadcom to finance the first phase of chip production, which would consume 1.3 GW of data center capacity and cost around $18 billion, according to The Information, which cited an internal memo and people familiar with the matter.

AVGO’s Microsoft Dependency 

The negotiations have hit a snag, as Broadcom has said it would finance the first phase only if Microsoft (MSFT) agrees to buy roughly 40% of the chips, an OpenAI executive told colleagues in a memo last month. Under the proposed arrangement, Microsoft would install the chips in its data centers and then rent them back to OpenAI.  

Microsoft has yet to sign a firm purchase agreement to use the chips developed by AVGO and OpenAI. This hesitation stems from a fundamental infrastructure disagreement where OpenAI envisions specialized data centers optimized for its custom silicon chip, whereas Microsoft prefers its standard, versatile data center designs, as per the report. 

Microsoft could choose not to buy OpenAI’s chips, which would change the project's financing terms, the memo said. A purchase commitment from Microsoft would give Broadcom confidence it would get its money back, according to a person involved in the talks. 

Broadcom is not particularly happy about the risk that Microsoft might not choose to buy the chips and thinks it is OpenAI’s mandate to ensure Microsoft does, as per the memo.

High Stakes for OpenAI

The stakes for OpenAI are existential as it looks to burn through over $200 billion in operating expenses through 2029. Owning its own chips rather than being dependent on Nvidia is a primary strategy to manage its bloating expenditure plans. 

The project, code-named Nexus, represents OpenAI’s efforts to break free from its costly reliance on Nvidia hardware to run its AI models. The first chip that AVGO and OpenAI might design is codenamed ‘Jalapeno.’

AVGO Retail View 

Retail sentiment on Stocktwits was ‘bearish’ with ‘normal’ message volumes. 

One user highlighted that the snag might force OpenAI to go back to Nvidia. 

AVGO stock has surged 104% over the past 12 months. 

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