Broadcom Inc. (AVGO) designs, develops and supplies semiconductor infrastructure software solutions. It operates through two segments, Semiconductor Solutions; and Infrastructure Software. On the other hand, Advanced Micro Devices, Inc. (AMD) operates as a semiconductor company worldwide. The company operates in two segments, Computing and Graphics; and Enterprise, Embedded, and Semi-Custom.
Even though the ongoing global semiconductor shortage has impacted several industries, the semiconductor industry has been thriving due to the rising prices of chips. While huge investments are helping semiconductor manufacturers increase production, the supply shortage may not end anytime soon. Increased demand for chips, primarily from consumer electronics and automotive industries, should keep driving the industry’s growth. According to a Fortune Business Insights report, the global semiconductor market is projected to grow at a CAGR of 8.6% between 2021 and 2028. Therefore, both AVGO and AMD should benefit.
AMD has gained 6.2% over the past month, while AVGO has returned 5.6%. Also, AMD’s 32.7% gains over the past three months are significantly higher than AVGO’s 18.9% returns. Moreover, AMD is the clear winner with 78.1% gains versus AVGO’s 27.3% returns in terms of the past six months’ performance.
But which of these two stocks is a better buy now? Let’s find out.
On December 7, 2021, AVGO announced its acquisition of privately-held AppNeta Inc., headquartered in Boston, MA. This acquisition could bolster the company’s network performance monitoring across the internet and hybrid cloud-based applications.
On November 30, 2021, AMD announced that Amazon Web Services, Inc. had expanded its AMD EPYC processor-based offerings with the general availability of general-purpose Amazon EC2 M6a instances. Lynn Comp, corporate vice president, Cloud Business, AMD, said, “This announcement shows our strong collaboration as well as highlights our overall momentum in cloud infrastructure.”
Recent Financial Results
AVGO’s revenue increased 16% year-over-year to $6.78 billion for the fiscal third quarter ended September 25, 2021. The company’s adjusted EBITDA grew 23.4% year-over-year to $4.12 billion, while its non-GAAP net income came in at $3.12 billion, representing a 28.3% year-over-year increase. Also, its non-GAAP EPS came in at $6.96, up 28.9% year-over-year.
AMD’s revenue increased 54% year-over-year to $4.31 billion for the fiscal third quarter ended September 25, 2021. The company’s non-GAAP operating income grew 101% year-over-year to $1.06 billion, while its non-GAAP net income came in at $893 million, representing a 78% year-over-year increase. Also, its non-GAAP EPS came in at $0.73, up 78% year-over-year.
Past and Expected Financial Performance
AVGO’s revenue and EBITDA grew at CAGRs of 9.4% and 32.4%, respectively, over the past three years. Analysts expect AVGO’s revenue to increase 14.8% in fiscal 2021 and 7.6% in fiscal 2022. The company’s EPS is expected to grow 26.1% in fiscal 2021 and 11.5% in fiscal 2022. Moreover, its EPS is expected to grow at a rate of 14.7% per annum over the next five years.
On the other hand, AMD’s revenue and EBITDA grew at CAGRs of 15.5% and 80%, respectively, over the past three years. The company’s revenue is expected to increase 65.2% in fiscal 2021 and 18.8% in fiscal 2021. Its EPS is expected to grow 103.9% in fiscal 2021 and 26.6% in fiscal 2022. Also, AMD’s EPS is expected to grow at a rate of 35.3% per annum over the next five years.
AVGO’s trailing-12-month revenue is 1.79 times what AMD generates. AVGO is also more profitable with a gross profit margin and EBITDA margin of 73.61% and 52.53% compared to AMD’s 46.82% and 23.05%, respectively
However, AMD’s ROE, ROA, and ROTC of 72.14%, 20.93%, and 30.98% are higher than AVGO’s 25.32%, 6.16%, and 7.18%, respectively.
In terms of forward non-GAAP P/E, AMD is currently trading at 54.78x, 159.9% higher than AVGO’s 21.08x. Moreover, AMD’s forward EV/EBITDA ratio of 40.46x is 156.7% higher than AVGO’s 15.76x.
So, AVGO is relatively affordable here.
AVGO has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. On the other hand, AMD has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
AVGO has a B grade for Sentiment. This is justified as the Wall Street analysts expect the stock to hit $632 in the near term, which indicates a potential upside of 7.1%. On the other hand, AMD has a C grade for Sentiment, as the Wall Street analysts expect the stock to hit $141.95 in the near term, which indicates a potential decline of 2%.
Moreover, AVGO has a B grade for Stability, in sync with its beta of 0.95. On the other hand, AMD has a D grade for Stability, consistent with its beta of 1.93.
Of the 99 stocks in the A-rated Semiconductor & Wireless Chip industry, AVGO is ranked first. In comparison, AMD is ranked #82.
The semiconductor space is booming with the rising demand for chips. While both AVGO and AMD are expected to benefit, it is better to bet on AVGO now because of its lower valuation, higher profit margin, and better growth prospects.
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.
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AVGO shares fell $1.51 (-0.26%) in after-hours trading Wednesday. Year-to-date, AVGO has gained 37.53%, versus a 26.81% 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. More...
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