Regarding stocks tied to the semiconductor industry, investors may look to either Advanced Micro Devices (AMD 2.37%) or Broadcom (AVGO 3.84%). Each of these companies has generated considerable returns over the last few years. Moreover, both chip stocks are fabless companies that rely heavily on Taiwan Semiconductor to make their products.
Nonetheless, each company pursues different markets, and consequently, returns have varied significantly. Hence, when comparing the businesses and financials of the companies, one might stand out as the more suitable investment.
AMD vs. Broadcom
AMD and Broadcom are different kinds of chip companies. AMD specializes in central processing units (CPUs) and graphics processing units (GPUs). To that end, it focuses on client computing (meaning PCs), gaming, and data centers, giving it a heavy consumer focus.
That has changed somewhat thanks to its acquisition of Xilinx. This move took AMD more deeply into the embedded-chip businesses, a move that will probably complement its data-center segment and shift more of its customer focus toward enterprise clients.
That makes AMD more similar to Broadcom, a business-to-business (B2B) chip provider. Broadcom employs engineers near its largest clients, developing collaborative chip solutions to meet the needs of enterprises. As such, its chips are not typically recognized by the public, though it developed the Wi-Fi hotspot chip in Apple's iPhone.
Additionally, Broadcom began acquiring enterprise software and cybersecurity companies in 2018 to diversify its business. In many cases, its software integrates with its hardware, and the company will likely expand on that fusion once it completes its acquisition of VMWare. That purchase should enhance Broadcom's abilities to connect applications to the cloud.
How they fare financially
With the fiscal years of both companies different, a financial comparison is more complicated. However, both have experienced slowdowns as the notoriously cyclical semiconductor industry fell into a downturn.
In AMD's second quarter of 2023, its revenue fell by 18% compared with the same quarter last year. While all segments, except embedded, experienced flat or declining revenue, the 54% yearly revenue drop from the client segment took a particularly heavy toll.
Also, with little change in operating expenses, net income for AMD's Q2 fell to $27 million versus $447 million in the year-ago quarter.
In contrast, Broadcom grew revenue by 5% in Q3 of fiscal 2023 (ended July 30). The company experienced higher increases in operating expenses, but thanks to income from investments, interest, and other sources, net income for the quarter came in at $3.3 billion, rising 10% over the last year.
And unlike AMD, Broadcom pays a dividend that has risen at least once yearly since its first payout in 2010. At $18.40 per share annually, it offers a dividend yield of around 2.2%, well above the S&P 500's 1.6% average. For these reasons, it is little wonder that Broadcom stock outperformed AMD over the last year.
AMD Total Return Level data by YCharts.
From a five-year perspective, both stocks outperform the S&P 500. Broadcom now holds a slight edge, though AMD held the lead for most of the 2020s. Furthermore, since AMD's forward price-to-earnings (P/E) ratio of 38 is much higher than Broadcom's forward multiple of 20, investors may wonder whether AMD's premium valuation is worth that cost.
AMD or Broadcom?
Although both stocks should continue outperforming the S&P 500, investors should probably give the edge to Broadcom. Ultimately, it derives higher growth with a more diversified business, and its rising dividend offers a bonus to shareholders.
Indeed, if valuations and growth levels change dramatically, investors may want to reevaluate this comparison. But for now, investors have few reasons to pay the higher premium for AMD stock.
