Qualcomm Incorporated (QCOM) and Broadcom Inc. (AVGO) are two of the world’s biggest chip makers. They supply chips to Apple Inc. (AAPL) among other tech giants. QCOM is a wireless technology company engaged in the development, launch and expansion of technologies such as 5G. AVGO designs, develops and supplies a range of semiconductor and infrastructure software solutions.
iPhones have a loyal consumer base. Consumers that use iPhones generally stay with the product, given its constant innovations and upgrades and compatibility with other AAPL products. In fact, iOS volumes increased 6.5% year-over-year in 2020.
Because QCOM and AVGO play an important role in the manufacture of iPhones, it is reasonable that they will witness increasing demand for their chips in the near term. Furthermore, the demand QCOM’s and AVGO’s products and services could also continue increasing, driven by end-use markets other than AAPL consumers.
While QCOM has returned 78.1% over the past year, AVGO has gained 75.1%. But, in terms of past nine-month’s performance, AVGO is a clear winner with 45% returns versus QCOM’s 43.6%. But which of these two stocks is a better pick now? Let’s find out.
Qualcomm Technologies, Inc., QCOM’s subsidiary, completed the acquisition of NUVIA on March 16, 2021. This is expected to enhance its CPU roadmap and extend its leading technology position with the Windows, Android and Chrome ecosystems. The first Qualcomm Snapdragon platforms to feature its technologies’ new internally designed CPUs are expected to be available in the second half of 2022, designed for high performance ultraportable laptops.
On April 13, 2021, AVGO announced a strategic collaboration with Google Cloud to accelerate innovation and strengthen cloud services integration within its core software franchises. Under this partnership, AVGO is expected to deliver its suite of security and enterprise operations software on Google Cloud, enabling businesses to deploy its solutions in security, DevOps, and more on Google Cloud’s trusted global infrastructure.
Note that AVGO is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.
Recent Financial Results
QCOM’s revenue increased 62.2% year-over-year to $8.24 billion for the quarter ended December 27, 2020. Its operating income increased 145.2% year-over-year to $2.53 billion. The company’s net income came in at $2.46 billion, which represents a 165.4% year-over-year rise. Its non-GAAP EPS came in at $2.17, up 119.2% year-over-year.
AVGO’s revenue for the quarter ended January 31, 2021 was $6.66 billion, up 13.6% year-over-year. The company’s gross profit was t $3.95 billion, which represents an increase of 21.1% year-over-year. Its operating income increased 157.3% year-over-year to $1.84 billion. Its net income came in at $1.38 billion, up 257.9% year-over-year, while its non-GAAP EPS increased 25.9% year-over-year to $6.61.
Past and Expected Financial Performance
QCOM’s revenue and EBITDA increased at CAGRs of 6.1% and 13.9%, respectively, over the past three years.
Analysts expect QCOM’s revenue to increase 46.4% for the quarter ended March 31, 2021, 43.1% in its fiscal year 2021 and 7.9% in its fiscal year 2022. The company’s EPS is expected to grow 89.8% for the quarter ended March 31, 2021, 76.7% for the quarter ending June 30, 2021 and 74% in its fiscal year 2021. Also, its EPS is expected to grow at a rate of 24.5% per annum over the next five years.
In comparison, AVGO’s revenue and EBITDA have increased at CAGRs of 9.5 % and 14.4 %, respectively, over the past three years.
Analysts expect AVGO’s revenue to increase 14.2% for the quarter ended March 31, 2021, 12.4% in fiscal 2021 and 5.1% in its fiscal year 2022. Its EPS is expected to grow 24.9% for the quarter ended March 31, 2021, 22% for the quarter ending June 30, 2021 and 21.3% in its fiscal year 2021. Also, the company’s EPS is expected to grow at a rate of 8.6% per annum over the next five years.
QCOM’s trailing-12-month revenue is 1.08 times AVGO’s. QCOM is also more profitable, with a net income margin of 25.2% versus AVGO’s 16%.
QCOM’s ROE and ROA of 113.1% and 13.7%, respectively, compare favorably with AVGO’s 16.4% and 4.3%.
In terms of forward non-GAAP P/E, AVGO is currently trading at 18.10x, which is 7% higher than QCOM, which is currently trading at 16.91x. AVGO is also more expensive in terms of trailing-12-month P/S (7.45x versus 5.64x).
In terms of forward EV/Sales, AVGO’s 8.12x is 63.4% higher than QCOM’s 4.97x.
So, QCOM is the more affordable stock.
QCOM has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. However, AVGO has an overall A rating, which represents a Strong Buy.
QCOM has a B grade for Value, which is consistent with its forward price/sales ratio of 4.86x, which is slightly higher than the industry average 4.04x. However, AVGO has a C grade for Value, which is in sync with its forward P/S ratio of 6.92x, which is 71.3% higher than the industry average 4.04x.
Moreover, among 98 stocks in the B-rated Semiconductor & Wireless Chip industry, AVGO is ranked #4 and QCOM is ranked #13.
In addition to the POWR Ratings grade we’ve just highlighted, both AVGO and QCOM are rated for Growth, Stability, Momentum, Sentiment, and Quality. Click here to see the additional ratings for AVGO. And get all QCOM’s ratings here.
AVGO and QCOM can be considered good long-term investments considering their global market dominance and the increasing demand for semiconductor chips. However, QCOM appears to be the better buy given its relatively lower valuation and better revenue and EPS estimates.
Click here to learn about other top-rated stocks in the Semiconductor & Wireless Chip industry.
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QCOM shares were trading at $135.49 per share on Friday afternoon, up $2.52 (+1.90%). Year-to-date, QCOM has declined -10.64%, versus a 11.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Ananyo Guha Niyogi
Ananyo’s ardent interest in capital markets, wealth management, and financial regulatory issues, led him to a career as an investment analyst. His goal is to educate individual investors by making complex financial issues easy to understand. More...
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