Texas Instruments (TXN -1.23%) and Broadcom (AVGO -1.84%) both outperformed the market in 2022 as many other semiconductor stocks withered. Over the past 12 months, the S&P 500 declined 8% and the Philadelphia Semiconductor Index fell 11% -- yet TI's stock only dipped 1% as Broadcom's stock advanced 6%.
TI and Broadcom held steady for similar reasons: They were well diversified across a wide range of sectors; had limited exposure to the post-pandemic slowdown of the PC market, which hurt many other chipmakers; and they generated plenty of cash for big buybacks and dividends. But should investors buy either of these market-beating chip stocks today?
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The four differences between TI and Broadcom
TI and Broadcom might seem fundamentally similar, but they differ in four major ways.
First, TI is an integrated device manufacturer (IDM), which manufactures most of its chips at its domestic foundries. Broadcom is a fabless chipmaker, which outsources its production to third-party foundries like TSMC and GlobalFoundries.
IDMs run a more capital-intensive business, but they maintain tighter control over the development and production of their own chips. Fabless chipmakers require less capital to operate and don't face constant pressure to expand their production capabilities.
However, TI's status as a domestic IDM will enable it to benefit from the new CHIPS and Science Act in the U.S., which grants subsidies and tax breaks to domestic chipmakers, while Broadcom probably won't reap the same benefits.
Second, Broadcom owns an infrastructure software business, which generated 22% of its revenues in fiscal 2022 (which ended last October). That business was built upon its acquisitions of CA Technologies in 2018 and Symantec's enterprise security division in 2019, and it could become an even larger part of Broadcom's business if its pending acquisition of the cloud software giant VMware is approved this year.
TI doesn't operate a big software business, and it generates most of its revenue by selling analog and embedded chips to a wide range of customers. TI also isn't heavily dependent on acquisitions, while Broadcom -- which was known as Avago before it acquired the original Broadcom in 2016 -- continues to expand through big and ambitious acquisitions.
Third, TI and Broadcom are supported by different markets. TI mainly depends on the auto and industrial markets for most of its growth, while Broadcom relies more on the hyperscale, service provider, enterprise, and wireless markets.
Lastly, Broadcom relied on Apple, which uses its Wi-Fi and Bluetooth combo chips in its devices, for 20% of its revenues in fiscal 2021 and fiscal 2022. TI's top customer (which is also most likely Apple) only accounted for 9% of its sales in 2021. Broadcom's heavier exposure to Apple is worrisome, since Apple is expected to replace those chips with its own silicon by 2025, but it's been bracing that potential loss by expanding its software business.
Which chipmaker is growing faster?
In 2022, TI's revenue and earnings grew 9% and 14%, respectively, as the post-pandemic recovery of the automotive market offset the softer growth of its other end markets and the impact of COVID-19 restrictions in China.
But on a quarterly basis, its year-over-year growth cooled off throughout all of 2022 as macro headwinds hammered all of its end markets -- except for the automotive sector. TI expects that slowdown to persist in the first half of 2023, and analysts expect TI's revenue and earnings to decline 9% and 19%, respectively, for the full year. But like many other chipmakers, TI expects the broader semiconductor market to recover in the second half of the year.
Broadcom's revenue and adjusted earnings grew 21% and 34%, respectively, in fiscal 2022. It weathered the macro headwinds as more enterprise, service provider, and wireless customers upgraded their hardware. That's the same infrastructure spending trend that boosted Cisco's sales and profits over the past year.
For now, analysts expect Broadcom's revenue and adjusted earnings to grow 6% and 8%, respectively, in fiscal 2023. That slowdown will likely be caused by slower sales of iPhones and tougher macroeconomic headwinds for its infrastructure software business. However, those estimates don't factor in its pending acquisition of VMware, which could close in 2023 and boost its reported revenues by the double digits again.
The better buy: Broadcom
TI and Broadcom are both well-run chipmakers, but the former is more cyclical and conservative -- while the latter is arguably more resistant to the macro headwinds and more aggressive with its acquisitions. Broadcom is also fundamentally cheaper than TI, but it's growing at a faster rate. TI trades at 23 times forward earnings and pays a forward yield of 2.8%, while Broadcom trades at just 14 times forward earnings and pays a higher forward yield of 3.1%. That lower valuation -- along with all its other aforementioned strengths -- make Broadcom a better semiconductor play than TI.
