AMD (NASDAQ: AMD) and Broadcom (NASDAQ: AVGO) embody contrasting investment avenues within the burgeoning semiconductor realm. AMD, ranking as the second-largest producer of x86 CPUs and discrete GPUs globally, has witnessed an impressive 625% surge in its stock over the last five years. In comparison, Broadcom’s stock soared by 370% during the same period, outperforming the Philadelphia Semiconductor Index’s uptick of almost 220%. While AMD undoubtedly enriched its investors, the looming question remains – which stock is the wiser choice moving forward?
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Decoding AMD and Broadcom
AMD distinguished itself by gaining traction against industry giants like Intel in the PC and server sectors, remaining competitive with Nvidia in gaming GPUs, and introducing new data center GPUs tailored for the artificial intelligence (AI) market. Furthermore, AMD’s acquisition of Xilinx in early 2022 expanded its chip portfolio to encompass field-programmable gate array (FPGA) chips, allowing for customization across a wide array of functions.
In contrast, Broadcom markets a diverse range of chips, with approximately one-fifth of its total revenue stemming from wireless, radio frequency, and 5G chip sales to tech titan Apple in fiscal 2023. Noteworthy expansions in Broadcom’s infrastructure software business, facilitated by acquisitions of CA Technologies, Symantec’s enterprise security unit, and VMware, have been set in motion. Following its acquisition of VMware in November 2023, Broadcom aspires to derive roughly half of its revenue from software operations.
Comparing Growth Trajectories
In 2022, AMD witnessed a 44% surge in revenue and a 25% rise in adjusted EPS, primarily fueled by the Xilinx acquisition. However, the company contended with decelerated sales of PC CPUs and GPUs within a post-pandemic market setting. The year 2023 proved to be a tumultuous one for AMD, as revenue dipped by 4% and adjusted EPS plummeted by 24%, with dwindling sales of gaming consoles from Sony and Microsoft heavily impacting the semiconductor sales landscape.
Looking ahead to 2024, analysts anticipate a 14% growth in revenue and a substantial 36% surge in adjusted EPS for AMD, signaling a potential ebb in the cyclical downturn as PC markets stabilize and the AI market witness a surge in Instinct GPU deployment. However, despite these positive projections, AMD’s stock currently trades at 53 times forward earnings, hinting at a possible overvaluation. The resurgence of Intel poses a formidable threat, with the potential to reclaim lost ground in the PC and server domains over the forthcoming years.
Conversely, in fiscal 2022, Broadcom experienced a 21% revenue boost and a whopping 77% surge in EPS, propelled by robust chip sales across hyperscale, service provider, and enterprise sectors. Concurrently, its infrastructure software business exhibited notable growth trends. Fiscal 2023 painted a slightly different picture, with an 8% uptick in revenue and a 12% rise in EPS for Broadcom. Strong sales of data center chips catering to AI applications, coupled with steady software business expansions, offset the sluggish chip sales to Apple and industrial clients. Notably, Broadcom remained shielded from the dwindling PC market exposures that affected AMD.
Forecasts for fiscal 2024 project a 40% revenue growth and a 10% EPS rise for Broadcom, with recent VMware acquisitions fueling the top-line progression. Looking further into fiscal 2025, analysts predict an 11% revenue uptick and a 20% rise in EPS, with the revenue boost predominantly attributed to the VMware acquisition aftermath. Based on these projections, Broadcom’s stock appears reasonably valued at 28 times forward earnings. Moreover, with a decent forward dividend yield of 1.6%, Broadcom emerges as a dividend-paying entity which AMD currently lacks.
The Winning Bet: Broadcom
Both AMD and Broadcom represent durable long-term investments within the burgeoning semiconductor landscape. However, when pressed to pick a frontrunner at this juncture, Broadcom emerges as the preferred choice for several reasons: its diversified business model, stable growth rates, attractive stock valuation, and reliable dividend payouts. Meanwhile, AMD’s valuations may be slightly inflated by AI frenzy, with potential reverberations should its Instinct GPUs fail to catalyze business growth in forthcoming quarters.
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Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Microsoft, and Nvidia. The Motley Fool recommends Broadcom and Intel and suggests options including long calls on Intel and Microsoft, as well as short calls on Intel and Microsoft. The Motley Fool upholds a disclosure policy.
The views and opinions expressed herein reflect the author’s perspectives and do not necessarily align with those of Nasdaq, Inc.
