Broadcom Inc. (AVGO) in San Jose, Calif., designs, develops, and supplies semiconductor infrastructure software solutions. It operates through two segments, Semiconductor Solutions; and Infrastructure Software. In comparison, Advanced Micro Devices, Inc. (AMD) in Santa Clara, Calif., operates as a semiconductor company worldwide. The company operates in two segments, Computing and Graphics; and Enterprise, Embedded, and Semi-Custom.
The global semiconductor shortage exacerbated by rising COVID-19 cases in China and the Russia-Ukraine war has severely impacted the automotive and consumer electronics industries. However, robust demand has allowed companies to raise prices for their chips and generate substantial profits. Furthermore, rising government and private investments to address the supply crunch should help the industry grow significantly in the coming months. According to BlueWeave consulting, the global semiconductor market is estimated to grow at a 5.2% CAGR between 2022 and 2028. Therefore, both AVGO and AMD should benefit.
AMD stock has gained 26.1% in price over the past year, while AVGO has returned 19.6%. However, AVGO’s 0.7% gains over the past six months compare with AMD’s negative returns. And AVGO is the clear winner with 13.4% gains versus AMD’s negative returns in terms of the past nine months’ performance.
But which of these two stocks is a better buy now? Let’s find out.
Latest Developments
On April 12, 2022, AVGO announced an agreement to acquire all the outstanding shares of VMware, Inc. (VMW) in a $61 billion cash-and-stock transaction. Hock Tan, President and CEO of AVGO, said, “Building upon our proven track record of successful M&A, this transaction combines our leading semiconductor and infrastructure software businesses with an iconic pioneer and innovator in enterprise software as we reimagine what we can deliver to customers as a leading infrastructure technology company.”
On May 26, 2022, AMD announced that it had acquired Pensando Systems in a transaction valued at approximately $1.90 billion. AMD Chair and CEO Dr. Lisa Su said, “The data center remains one of the largest growth opportunities for AMD. The addition of the Pensando Systems team with their hardware and software portfolio will enable us to offer cloud, enterprise and edge customers a broader portfolio of leadership compute engines that can be optimized for their specific workloads.”
Recent Financial Results
AVGO’s revenue increased 16% year-over-year to $8.10 billion for its fiscal second quarter, ended May 1, 2022. The company’s adjusted EBITDA grew 29.1% year-over-year to $5.11 billion, while its non-GAAP net income came in at $4 billion, representing a 34.2% year-over-year increase. Also, its non-GAAP EPS was $9.07, up 37% year-over-year.
AMD’s revenues have increased 71% year-over-year to $5.89 billion for its fiscal first quarter, which ended March 26, 2022. The company’s non-GAAP operating income grew 141% year-over-year to $1.84 billion, while its non-GAAP net income came in at $1.59 billion, representing a 148% year-over-year increase. And its non-GAAP EPS was $1.13, up 117% year-over-year.
Past and Expected Financial Performance
AVGO’s revenue and EPS have grown at CAGRs of 10.2% and 39%, respectively, over the past three years. Analysts expect AVGO’s revenue to increase 17.9% in its fiscal 2022 and 6.2% in fiscal 2023. The company’s EPS is expected to grow 28.9% in fiscal 2022 and 8.4% in fiscal 2023. And its EPS is expected to grow at a 14.7% rate per annum over the next five years.
In comparison, AMD’s revenue and EPS have grown at CAGRs of 45.7% and 120.4%, respectively, over the past three years. The company’s revenue is expected to increase 60.5% in its fiscal 2022 and 14.2% in fiscal 2023. Its EPS is expected to grow 57.7% in fiscal 2022 and 13.6% in fiscal 2023. Also, AMD’s EPS is expected to grow at a 32.8% rate per annum over the next five years.
Profitability
AVGO’s trailing-12-month revenue is 1.51 times what AMD generates. AVGO is also more profitable, with a gross profit margin and net income margin of 74.48% and 27.47%, respectively, compared to AMD’s 49.51% and 17.98%.
Furthermore, AVGO’s 33.32%, 9.59%, and 9.62% respective ROE, ROA, and ROTC of are higher than AMD’s 10.98%, 6.39%, and 7.63%.
Note that AVGO is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.
Valuation
In terms of forward non-GAAP P/E, AMD is currently trading at 21.08x, which is 40.8% higher than AVGO’s 14.97x. Furthermore, AMD’s 16.87x forward EV/EBITDA ratio is 37.7% higher than AVGO’s 12.25x.
So, AVGO is relatively affordable here.
POWR Ratings
AVGO has an overall A rating, which equates to a Strong Buy in our proprietary POWR Ratings system. In contrast, AMD has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
AVGO has an A grade for Growth, which is consistent with analysts’ expectations that its EPS and revenue will increase considerably. In comparison, AMD has a B grade for Growth.
Furthermore, AVGO has an A grade for Quality. This is justified given AVGO's 74.48% trailing-12-month gross profit margin, which is 48.1% higher than the 50.29% industry average. In comparison, AMD has a Quality grade of C, which is in sync with its 49.51% trailing-12-month gross profit margin, which is lower than the 50.29% industry average.
Of the 95 stocks in the B-rated Semiconductor & Wireless Chip industry, AVGO is ranked #7. In comparison, AMD is ranked #79.
Beyond what I have stated above, we have also rated the stocks for Sentiment, Value, Momentum, and Stability. Click here to view all the AVGO ratings. Also, get all the AMD ratings here.
Click here to checkout our Semiconductor Industry Report for 2022
The Winner
The semiconductor industry is expected to continue growing with advancements in artificial intelligence (AI), the Internet of Things (IoT), and 5G connectivity. And while both AVGO and AMD are expected to benefit, we think it is better to bet on AVGO now because of its lower valuation and higher profit margin.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Semiconductor & Wireless Chip industry here.
AVGO shares were trading at $577.25 per share on Friday afternoon, up $26.59 (+4.83%). Year-to-date, AVGO has declined -12.66%, versus a -12.88% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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