A Chip Company You Probably Never Heard of Is Suddenly Worth $1 Trillion. Here's Why, and What It Means for Nvidia. Nvidia currently has an estimated 90% of the market share of advanced AI chips, but companies making custom chips are gaining ground.

^{This article originally appeared on Business Insider.}

The rise of AI, and the computing power it requires, is bringing all kinds of previously under-the-radar companies into the limelight. This week, it's Broadcom.

Its stock has soared since late last week, catapulting the company into the $1 trillion-market-cap club. The boost came from a blockbuster earnings report in which its custom-AI-chip revenue grew 220% compared with last year.

In addition to selling a lot of parts and components for data centers, Broadcom designs and sells application-specific integrated circuits — meaning custom chips.

Designers of custom AI chips, chief among them Broadcom and Marvell, are headed into a growth phase, Morgan Stanley says.

Custom chips are picking up speed

The biggest players in artificial intelligence buy a lot of chips from Nvidia, the $3 trillion giant with an estimated 90% of the market share of advanced AI chips.

Heavily relying on one supplier isn't a comfortable position for any company, though, and many large Nvidia customers are also developing their own chips. Most tech companies don't have large teams of silicon and hardware experts in-house. Of the companies they might turn to for a custom chip, Broadcom is the leader.

Though multipurpose chips like Nvidia's and AMD's graphics processing units are likely to maintain the largest share of the AI-chip market in the long term, custom chips are growing fast.

Morgan Stanley analysts this week forecast the market for ASICs to nearly double to $22 billion next year.

Much of that growth is attributable to Amazon Web Services' Trainium AI chip, Morgan Stanley analysts said. Then there are Google's in-house AI chips, known as Tensor Processing Units, which Broadcom helps make.

In terms of the actual value of chips in use, Amazon and Google dominate. But OpenAI, Apple, and TikTok's parent company, ByteDance, are all reportedly developing chips with Broadcom, too.

ASICs bring bargaining power

Custom chips can offer more value in terms of the performance you get for the cost, Morgan Stanley's research found.

ASICs can also be designed to match unique internal workloads for tech companies, the bank's analysts said. The better these custom chips get, the more bargaining power they may provide when tech companies negotiate with Nvidia over buying GPUs. But this will take time, the analysts wrote.

In addition to Broadcom, its Silicon Valley neighbor Marvell is making gains in the ASICs market, along with the Asia-based players Alchip Technologies and MediaTek, the analysts added in a note to investors.

Analysts don't expect custom chips to ever fully replace Nvidia GPUs, but without them, cloud service providers like AWS, Microsoft, and Google would have much less bargaining power against Nvidia.

"Over the long term, if they execute well, cloud service providers may enjoy greater bargaining power in AI semi procurement with their own custom silicon," the Morgan Stanley analysts said.

Nvidia's big R&D budget

This may not be all bad news for Nvidia. A $22 billion ASICs market is smaller than Nvidia's revenue for just one quarter.

Nvidia's research and development budget is massive, and many analysts are confident in its ability to stay at the bleeding edge of AI computing.

And as Nvidia rolls out new, more advanced GPUs, its older offerings get cheaper and perhaps more competitive with ASICs.

"We believe the cadence of ASICs needs to accelerate to stay competitive to GPUs," the Morgan Stanley analysts wrote.

Still, Broadcom and chip manufacturers on the supply-chain rung beneath, such as TSMC, are likely to get a boost every time a giant cloud company orders up another custom AI chip.