AMD (AMD 2.37%) and Broadcom (AVGO 3.84%) represent very different ways to invest in the secular expansion of the semiconductor market. AMD is the world's second-largest producer of x86 CPUs and discrete GPUs. Broadcom sells a wide range of wireless, networking, optical, data storage, and industrial chips, while its software business provides infrastructure, cloud, and cybersecurity services.
Over the past five years, AMD's stock surged 625% as Broadcom's stock rallied 370%. Both stocks outperformed the Philadelphia Semiconductor Index's gain of nearly 220%. AMD clearly made its investors richer, but is it still the better buy?
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The differences between AMD and Broadcom
AMD impressed investors by gaining ground against Intel in the PC and server markets, keeping pace with Nvidia in gaming GPUs, and rolling out new data center GPUs for the artificial intelligence (AI) market. AMD's acquisition of Xilinx in early 2022 also expanded its portfolio of embedded chips to include field-programmable gate array (FPGA) chips, which can be customized for a wide range of tasks.
Broadcom sells a wide range of chips, but it generated about a fifth of its total revenue by selling wireless, radio frequency, and 5G chips to Apple in fiscal 2023 (which ended last October). But over the past few years, Broadcom built a new infrastructure software business by acquiring CA Technologies, Symantec's enterprise security unit, and the cloud giant VMware. Since closing its takeover of Vmware last November, Broadcom aims to generate about half of its revenue from its software business.
Which chipmaker is growing faster?
AMD's revenue and adjusted EPS rose 44% and 25%, respectively, in 2022, but most of that growth came from the acquisition of Xilinx. That inorganic growth masked AMD's slower sales of PC CPUs and GPUs in a post-pandemic market.
But in 2023 AMD's revenue and adjusted EPS fell 4% and 24%, respectively, as it lapped that acquisition and grappled with the PC market's ongoing slowdown. Sluggish sales of Sony's PS5 and Microsoft's Xbox Series S and X consoles -- which all use AMD's semi-custom APUs -- exacerbated that pain. AMD offset some of that pressure by selling more Epyc CPUs and Instinct GPUs for data centers.
In 2024, analysts expect AMD's revenue and adjusted EPS to rise 14% and 36%, respectively, as the PC market stabilizes and it ramps up its shipments of Instinct GPUs for the AI market. That acceleration indicates that AMD has finally passed its cyclical trough, but its stock isn't cheap at 53 times forward earnings. A resurgent Intel could also start gaining ground against AMD in the PC and server markets over the next few years.
Broadcom's revenue and EPS rose 21% and 77%, respectively, in fiscal 2022. That growth was driven by brisk sales of its chips across the hyperscale, service provider, and enterprise markets. Its infrastructure software business also grew.
In fiscal 2023, Broadcom's revenue and EPS grew 8% and 12%, respectively. Its strong sales of data center chips for AI applications -- along with the steady growth of its software business -- offset its slower chip sales to Apple and its industrial customers. And unlike AMD, Broadcom didn't have too much exposure to the weak PC market.
Analysts expect Broadcom's revenue and EPS to grow 40% and 10%, respectively, in fiscal 2024, but most of its top-line growth will be driven by its recent acquisition of VMware. For fiscal 2025, analysts expect its revenue and EPS to rise 11% and 20%, respectively, as it laps that acquisition. Based on those estimates, Broadcom's stock still looks reasonably valued at 28 times forward earnings. It also pays a decent forward dividend yield of 1.6%, while AMD doesn't pay dividends.
The better buy: Broadcom
AMD and Broadcom are both solid long-term plays on the growing semiconductor market. But if I had to pick one right now, I'd buy Broadcom for four reasons: Its business is more diversified, its growth rates are more stable, its stock is cheaper, and it pays a reliable dividend. AMD's valuations are still being inflated by a bit of AI hype -- and they might pop if its Instinct GPUs don't light a blazing fire under its business over the next few quarters.
