Digitization has leapt forward amid the COVID-19 pandemic, which has forced the world to operate remotely. And the semiconductor space has been gaining from expanding digitization and people’s increasing dependence on smart devices to stay connected.

NVIDIA Corporation (NVDA) and Broadcom Inc. (AVGO), two of the world’s prominent semiconductor manufacturing companies,  benefited immensely last year as the coronavirus-induced work-and-learn-from-home trend spurred unprecedented demand for microchips from PC manufacturers and data-center operators.

Both  stocks have generated good returns over the past three years. While NVDA returned 147.9% over this period, AVGO gained 125.9%. In terms of year-to-date performance,  NVDA is a clear winner with 9.3% returns versus AVGO’s 8.4%. However, I would like to explain why we think AVGO is a better stock fundamentally.

Business Structure and Latest Movements  

As one of the key suppliers of the steadily expanding global gaming industry, NVDA operates as a visual computing company worldwide. It deals in graphics processing units (GPU), PC gaming, processors, and artificial intelligence (AI). NVDA’s products and services have applications in the professional visualization, datacenter, and automotive industries. It operates primarily through two segments – GPU and Tegra Processor.

NVDA  recently launched the latest version of its virtual graphics processing unit (vGPU) software, which brings GPU virtualization to a broad range of workloads, such as virtual desktop infrastructure, high-performance graphics, data analytics and AI, along with  support for its new NVIDIA A40 and NVIDIA A100 80GB GPUs. NVDA has been forming alliances to advance its AI capabilities and has entered a collaboration with Amazon Web Services to provide 21 NVDA NGC software resources on the AWS platform.

However, NVDA’s Arm Limited acquisition from SoftBank Capital Limited and SVF Holdco (UK) Limited initiated in September is still under investigation by the U.K. competition regulator.

AVGO is a global technology leader that designs, develops and supplies a broad range of semiconductor and infrastructure software solutions. Its product portfolio serves critical markets, including data center, networking, enterprise software, broadband, wireless, storage and industrial. The company operates through two segments – Semiconductor Solutions and Infrastructure Software.

AVGO recently introduced its BCM4389 chip, which enables the world’s first Wi-Fi 6E phone. The chip combines the benefits of the sixth generation of Wi-Fi with the pristine 6 GHz band, and this expansion creates seven additional 160 MHz channels for the BCM4389. This unlocks the value of Wi-Fi 6E for remote work, education, telemedicine, and gaming. AVGO also delivered an industry’s first 7nm end-to-end 800G platform solution with 112-Gbps PAM-4 optical and copper PHY in December. It is designed for hyperscale data center and AI networks.

Recent Financial Results

In its fiscal third quarter ended October 31, 2020, AVGO reported a record top-line of $4.73 billion, growing 57% year-over-year. It also delivered record Gaming revenue and Data Center business revenue, increasing 37% and 162%, respectively, from the comparable quarter last year. Its non-GAAP EPS came in at $2.91, rising 63% from the year-ago value.

AVGO’s revenue has increased 12% year-over-year to $6.47 billion in the fourth quarter ended November 1, 2020. This was driven primarily by demand for networking from cloud and for broadband from service providers. Its infrastructure software revenue grew 36% from its year-ago value to $1.64 billion. Its  adjusted EPS came in at $6.35, rising 17.8% year-over-year.

Past and Expected Financial Performance

NVDA’s revenue and EPS have grown at a CAGR of 18.1% and 15.2%, respectively, over the past three  years. The  CAGR of the company’s free cash flow has been 28.9%.

Analysts expect NVDA’s revenue to increase 55.1% in the current quarter, 51% in the current year and 20.4% next year. The company’s EPS is expected to grow 48.1% in the current quarter, 67.9% in the current year and 20.2% next year. And  its EPS is expected to grow at a rate of 22% per annum over the next five years.

In comparison,  AVGO’s revenue and EPS have grown at a CAGR of 10.6% and 16.2%, respectively, over the past three  years. The CAGR of the company’s free cash flow has been 31.9%.

Analysts expect AVGO’s  revenue to increase 12.9% in the current quarter, 10.3% in the current year and 4.2% next year. The company’s EPS is expected to grow 24.8% in the current quarter, 18.3% in the current year and 7.1% next year. And  its EPS is expected to grow at a rate of 7.9% per annum over the next five years.

Profitability      

AVGO’s trailing-12-month revenue is 1.6 times NVDA’s. In addition, AVGO is more profitable, with a gross profit margin of 72.7% versus NVDA’ 63.7%.

Valuation

In terms of forward p/e, NVDA is currently trading at 87.17x, 115.6% more expensive than AVGO, which is currently trading at 40.43x. In addition, AVGO is less expensive in terms of trailing-12-month p/s (7.95x versus 24.01x).

In terms of trailing-12-month price/cash flow, NVDA’s 68.49x is 330% higher than AVGO’s 15.94x.

AVGO is much more affordable compared to NVDA.

POWR Ratings

AVGO has an overall rating of A, which equates to Strong Buy in our proprietary POWR Ratings system. However, NVDA has an overall rating of C, which translates to Neutral.

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

In terms of Growth Grade, AVGO has a B given its potential to grow at a higher rate than the industry average. This compares to a C grade  for NVDA.

AVGO has a Stability Grade of B, reflecting its lower  volatility than its peers, compared to a grade of C for NVDA.

While AVGO is ranked #7 of 96 stocks in the Semiconductor & Wireless Chip industry, NVDA is ranked #69 in the same industry.

Beyond what I stated above, our POWR Ratings system has also rated both NVDA and AVGO for Value, Momentum, Sentiment, Quality and Industry. Get all the NVDA ratings here. Also, click here to see the additional POWR Ratings for AVGO.

The Winner

Rapidly evolving trends in the field of AI and 5G should generate high demand for microchips used in smartphones, high-performance media devices, automobiles, and internet-of-things. Both NVDA and AVGO should benefit as digitalization and edge computing drive the next global industrial revolution. However, AVGO proves to be a better buy based on the factors discussed above.

AVGO’s strong returns in the infrastructure segment in the last quarter and investors’ bullish outlook on the booming chip market are  already driving its shares higher. AVGO’s category-leading product portfolio gives it an edge over NVDA because  it is better-positioned to meet the rising demand for wireless chips across multiple industries.

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NVDA shares were trading at $593.36 per share on Wednesday afternoon, up $22.83 (+4.00%). Year-to-date, NVDA has gained 13.63%, versus a 4.49% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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