Share prices of Advanced Micro Devices (AMD 2.37%) and Broadcom (AVGO 3.84%) soared impressively in the past year on investor anticipation that both chipmakers will take advantage of the booming market for artificial intelligence (AI) chips.
Broadcom stock is up 95% in the past year while AMD is up 85%. As a result, both stocks trade at rich valuations compared to historical levels. But if you have to choose one of these two semiconductor stocks to make the most of the proliferation of AI, which one should you buy right now? Let's take a closer look and see if an answer emerges.
The case for Advanced Micro Devices
AMD should benefit from AI adoption in multiple ways. For instance, the company's data center business will get a massive boost this year thanks to the growing demand for its AI accelerators. Last year, AMD's data center business produced $6.5 billion in revenue, an increase of just 7% over 2022. The chipmaker will likely deliver much stronger growth in this segment in 2024. That's because it anticipates its AI graphics processing units (GPU) will generate at least $3.5 billion in revenue this year.
The sales ramp of AMD's latest AI accelerators started in 2023's Q4 as the company sold over $400 million worth of data center GPUs. AMD's data center GPU revenue is on track to jump significantly in 2024. Even better, AMD tells investors that even its own high projections could be underselling how much data center GPU revenue it could generate this year because it has the potential to access "additional capacity" to meet further demand.
Elsewhere, AMD's client processor business is likely to be another beneficiary of the AI revolution. The company claims that more than 90% of the AI-powered personal computers (PCs) in the market are powered by its Ryzen CPUs (central processing units). AMD has been pushing the envelope in the AI PC market with new chips that deliver "up to 60% more AI performance compared to our prior generation."
The chipmaker expects the adoption of AI PCs to pick up from the second half of the year, and this should unlock another solid long-term growth opportunity for AMD. The market for AI PCs is expected to grow from 50 million units in 2024 to over 167 million units in 2027, according to IDC. Even then, the AI PC market will have a lot of room as AI PCs are expected to account for 60% of global PC shipments after five years.
All this explains why analysts are expecting AMD's bottom line to grow nicely from 2024 following last year's drop of 24% to $2.65 per share.
AMD EPS Estimates for Current Fiscal Year data by YCharts
The case for Broadcom
Broadcom is the dominant player in custom chips, which is why it is all set to make a bigger dent in the AI semiconductor market this year. Broadcom recently released fiscal 2024 first-quarter results (for the quarter ended Feb. 4, 2024) and reported that its revenue from sales of AI chips quadrupled year over year to $2.3 billion.
What's more, the company expects to generate $10 billion in revenue this year from sales of AI chips. Broadcom's full-year revenue prediction of $50 billion means that AI is set to produce 20% of its top line in the current fiscal year. The good news for Broadcom is that the custom AI processor market is built for long-term growth. Morgan Stanley estimates that of the $182 billion revenue that the AI chip market could generate in 2027, 30% would come from custom processors.
This puts Broadcom's potential revenue opportunity from custom AI chips, formally known as application-specific integrated circuits (ASICs), at $55 billion. But at the same time, investors should note that Broadcom faces challenges in other niches of the semiconductor market. Its revenue from the broadband, wireless, industrial, and server storage markets was down last quarter, and the company is predicting most of these verticals to fall steeply in the current fiscal year.
That's the reason why Broadcom stock fell after its latest earnings report. The company couldn't raise the full-year guidance despite the growth in AI chip sales last quarter, thanks to the weaknesses mentioned above. So, even though Broadcom's AI business is booming, it may not be enough to give the overall business a big boost. That probably explains why its earnings are expected to grow at an annual pace of 14% over the next five years, which is well below AMD's projected annual earnings growth rate of 25% over the same period.
The verdict
We have seen that Broadcom is expected to grow at a slower pace than AMD over the next five years, but does this make the latter a better AI stock? To answer that, we will have to take a closer look at the valuations of these two semiconductor stocks.
Both AMD and Broadcom are trading at identical price-to-sales ratios of around 14. AMD, however, is much more expensive on a trailing earnings basis with a multiple of 367, while Broadcom has a price-to-earnings ratio of 47. But the gap narrows down when we compare the forward earnings multiples. AMD is trading at 58 times forward earnings as compared to Broadcom's reading of 27. That's not surprising, considering that AMD is forecast to clock faster bottom-line growth.
Additionally, AMD's price/earnings-to-growth ratio (PEG ratio) of just 0.79 as compared to Broadcom's PEG ratio of 1.46 suggests that it is the cheaper of the two with respect to its potential growth. More specifically, a PEG ratio of less than 1 suggests that a stock is undervalued.
So, even though Broadcom's AI revenue could be higher than AMD's this year, it doesn't necessarily make the former the better AI stock. AMD, after all, has more than one avenue to tap the AI market, while Broadcom could face stiff competition from Nvidia in custom AI chips, indicating that AMD could turn out to be a better AI play.
