Deepening chip shortage, slowing demand for PCs and peripherals, and rising tensions over Taiwan have been affecting the semiconductor industry lately. However, the signing of the $280 billion CHIPS and Science Act into law and the growing adoption of AI, cloud computing, 5G, robotics, gaming, and electric vehicles (EVs) are expected to drive the industry’s growth.

The worldwide semiconductor sales increased 13.3% year-over-year to $152.5 billion during the second quarter of 2022. Investors’ interest in this space is evident from the SPDR S&P Semiconductor ETF’s (XSD) 7.3% gains over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 4.7% returns.

According to a World Semiconductor Trade Statistics (WSTS) report, the market will grow by 13.9% in 2022 to $633 billion. So, Broadcom Inc. (AVGO) and Intel Corporation (INTC) should benefit.

AVGO designs, develops, and supplies a range of analog and digital semiconductor connectivity solutions and infrastructure software solutions. It develops semiconductor devices, focusing on complex digital and mixed-signal complementary metal-oxide-semiconductor-based devices and analog III-V-based products.

On the other hand, INTC designs, manufactures, and sells computer products and technologies that deliver networking, data storage, and communication platforms. It also provides IoT products, computer vision, machine learning-based sensing, data analysis, localization, mapping, and driving policy technology.

While INTC has lost 13.6% over the past month, AVGO has gained 4.5%. But which stock is a better buy now? Let’s find out.

Latest Developments

On August 22, 2022, AVGO and Tencent Holdings Ltd. (TCEHY) announced their strategic partnership to accelerate the adoption of high bandwidth co-packaged optics (CPO) network switches for cloud infrastructure.

AVGO will provide the 25.6-Tbps Humboldt CPO switch device that features its best-in-class StrataXGS Tomahawk 4 switch chip directly coupled and co-packaged with four 3.2-Tbps Silicon Photonics Chiplets In Package (SCIP) optical engines. This will address the rising demand for higher bandwidth and low power consumption.

On August 25, 2022, Taiwanese fabless semiconductor company MediaTek Inc. announced its strategic partnership with INTC to manufacture chips using Intel Foundry Services’ (IFS) advanced process technologies for a range of smart edge devices to build a more balanced, resilient supply chain.

IFS’ offering of a broad manufacturing platform with technologies optimized for high performance, low power, and always-on connectivity spans production-proven three-dimensional FinFET transistors to next-generation breakthroughs. This should nurture INTC’s relationship with MediaTek in the long run.

Recent Financial Results

For its fiscal 2022 second quarter ended May 1, 2022, AVGO’s net revenue increased 22.6% year-over-year to $8.10 billion. The company’s non-GAAP gross profit came in at $6.19 billion for the quarter, up 24.9% from the prior-year period. Its non-GAAP operating income came in at $4.94 billion, representing a 29.9% rise from the prior-year period.

While its non-GAAP net income increased 34.2% year-over-year to $4 billion, its non-GAAP EPS increased 37% to $9.07. As of May 1, 2022, the company had $9.01 billion in cash and cash equivalents. 

INTC’s non-GAAP net revenues for its fiscal 2022 second quarter ended July 2, 2022, decreased 17.3% year-over-year to $15.32 billion. The company’s non-GAAP gross profit came in at $6.87 billion, indicating a 38% decline from the prior-year period. Its non-GAAP operating income came in at $1.42 billion for the quarter, down 78.1% from the year-ago period.

INTC’s non-GAAP net income came in at $1.18 billion, representing a 78.8% decline from the prior-year period. Its non-GAAP EPS decreased 78.7% year-over-year to $0.29. It had $4.39 billion in cash and cash equivalents as of July 2, 2022.

Past and Expected Financial Performance

Over the past three years, AVGO’s EBITDA, net income, and total assets have increased at CAGRs of 18.4%, 37%, and 0.4%, respectively.

Analysts expect AVGO’s EPS to grow 31.9% from the year-ago period in fiscal 2022, ending October 31, 2022, and 8.5% in fiscal 2023. The company’s revenue is expected to grow 19.9% year-over-year in fiscal 2022 and 5.7% in fiscal 2023. Its EPS is expected to grow at a rate of 13.6% per annum over the next five years.

Over the past three years, INTC’s EBITDA, net income, and total assets have declined at CAGRs of 7.9%, 1.1%, and 35.2%.

INTC’s EPS is expected to decline 58.5% year-over-year in fiscal 2022, ending December 31, 2022, and 18.1% in fiscal 2023. The company’s revenue is expected to decline 11.3% year-over-year in fiscal 2022 and rise 3.1% in fiscal 2023. Its EPS is expected to grow at a 1.1% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward PEG, AVGO is currently trading at 0.87x, significantly lower than INTC’s 18.65x. In terms of non-GAAP P/E, AVGO’s 14.33x compares with INTC’s 14.86x.

Profitability

INTC’s trailing-12-month revenue is 2.5 times that of AVGO’s. However, AVGO is more profitable, with a 74.9% gross profit margin versus INTC’s 49.9%.

Furthermore, AVGO’s ROE, ROA and ROTC of 39.7%, 0.2% and 11.3% compare with INTC’s 20.5%, 0.1% and 6.2%, respectively.

POWR Ratings

While AVGO has an overall A grade, which translates to Strong Buy in our proprietary POWR Ratings system, INTC has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

AVGO has been graded an A in terms of Growth, which is in sync with its higher-than-industry growth rates over the past year. AVGO’s EBITDA has grown 29.1% over the past year, 66% above the industry average of 17.5%. INTC’s F grade for Growth reflects its negative EBITDA growth rate.

In terms of Sentiment, AVGO has been graded a B, consistent with favorable analysts’ estimates regarding its EPS growth. Analysts expect INTC’s EPS to improve 28.8% year-over-year to $10.06 in its fiscal 2022 fourth quarter ending October 31, 2022.

However, INTC’s D grade for Sentiment is in sync with analysts’ expectations that its EPS will decline 79.5% year-over-year to $0.35 in the fiscal 2022 third quarter ending September 30, 2022.

Of the 96 stocks in the B-rated Semiconductor & Wireless Chip industry, AVGO is ranked #6, while INTC is ranked #57.

Beyond what we have stated above, our POWR Ratings system has graded INTC and AVGO for Value, Momentum, Quality, and Stability. Get all AVGO ratings here. Also, click here to see the additional POWR Ratings for INTC.

The Winner

Despite the continued chip shortage, rising investments and impressive technological breakthroughs should benefit INTC and AVGO. However, AVGO is a better buy based on higher profitability and lower valuation.

Our research shows that the odds of success increase if one invests in stocks with an overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry.

AVGO shares fell $3.13 (-0.57%) in after-hours trading Thursday. Year-to-date, AVGO has declined -16.08%, versus a -11.02% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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