Oracle (ORCL 2.02%) and Broadcom (AVGO 3.84%) are often considered blue-chip tech stocks that are owned for stability instead of growth. Yet both stocks soared over the past year, and are now hovering near their all-time highs.
Over the past 12 months, Oracle's stock surged 85% as it impressed investors with the robust growth of its cloud-based services. Broadcom's stock advanced 74% as its semiconductor and infrastructure software divisions continued to grow in a difficult macro environment. Should investors touch either of these tech stocks after those massive rallies?
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Oracle is generating stable growth again
Oracle is one of the world's largest database software companies. But by the end of the previous decade, its growth stalled as competing cloud-based services gradually curbed the market's demand for its on-premise software. To keep pace with that shift, Oracle acquired cloud software giant NetSuite in 2016, expanded its own cloud infrastructure platform, and rolled out new cloud-based enterprise resourcing planning (ERP) services like Fusion.
That cloud-based transformation reduced Oracle's dependence on on-premise software and lit a fire under its revenue again. The company further expanded its cloud business by acquiring the healthcare IT software company Cerner for $28 billion last June.
But even as Oracle evolved and expanded, it still generated plenty of cash for its buybacks and dividends. It bought back 32% of its shares over the past five years, and currently pays a forward yield of 1.3%.
For fiscal 2023 (which ended on May 31), Oracle's revenue rose 7% on an organic basis (excluding Cerner) as its adjusted EPS grew 4%. That growth was largely driven by cloud services revenue, which rose 50% and accounted for 32% of its top line. For fiscal 2024, analysts expect Oracle's revenue and adjusted EPS to both grow about 8% as it fully laps its acquisition of Cerner. Based on those estimates, Oracle's stock doesn't seem too expensive at 23 times forward earnings.
Broadcom is still expanding
Back in 2016, the Singapore-based chipmaker Avago acquired the original Broadcom, assumed its name, and relocated its headquarters to the United States. This "new" Broadcom subsequently expanded into the infrastructure software market by acquiring CA Technologies in 2018 and Symantec's enterprise security division in 2019.
In fiscal 2022 (which ended last October), Broadcom generated 78% of its revenue from its semiconductor segment, which produces a wide range of chips for the mobile, data center, networking, wireless, storage, and industrial markets. The remaining 22% came from its infrastructure software business, which it's trying to expand again with the planned acquisition of the cloud software giant Vmware (VMW) for $61 billion. If that deal is approved, Broadcom expects its infrastructure software business to account for just half its top line and reduce its exposure to the cyclical chip market.
That diversification is important, because Broadcom generated 20% of its revenue from Apple (AAPL -0.35%), the largest buyer of its wireless chips, in fiscal 2022. Apple recently signed another multibillion dollar deal with Broadcom which will last a few more years, but there's still a lingering fear that Apple will eventually replace Broadcom's chips with its own silicon.
In fiscal 2022, Broadcom's revenue and adjusted EPS rose 21% and 34%, respectively. In fiscal 2023, analysts expect its revenue to dip 2% as the mobile and IT infrastructure markets cool, but for its adjusted EPS to still grow 2%.
Broadcom plows most of its cash into investments and acquisitions instead of buybacks, but it still pays an attractive forward yield of 2.1%. Its stock also still looks reasonably valued at 21 times forward earnings.
The winner: Oracle
I believe both of these blue-chip tech stocks are still worth buying at their all-time highs. But if I had to choose one over the other, I'd stick with Oracle -- its growth rates are more predictable, its business less cyclical, and it carefully balances its buybacks with smart acquisitions.
Broadcom should also continue to grow, but its heavy dependence on Apple, exposure to the macro headwinds across the semiconductor sector, and the regulatory challenges facing its planned takeover of Vmware could limit its near-term gains and prevent it from outperforming Oracle over the next 12 months.
