Intel (INTC +1.07%) was once considered a bellwether of the semiconductor market. It was the world's largest producer of x86 CPUs for PCs and servers, and it manufactured the world's smallest, densest, and most powerful chips.
But over the past 10 years, Intel's stock has declined by 37% even as the benchmark PHLX Semiconductor Sector index rallied by 243%. Intel underperformed most of its industry peers as it struggled with chip shortages, delays, and inconsistent strategies under three different CEOs. It lost the mobile CPU market, it fell behind Taiwan Semiconductor Manufacturing in the "process race" to make denser and more advanced chips, and it ceded large chunks of the desktop and laptop CPU markets to Advanced Micro Devices.
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Intel is now reportedly mulling drastic measures -- including a potential spin-off of its foundry unit, the sale of programmable chip division Altera, or even an outright sale of the entire company to Qualcomm. It might be tempting to buy Intel as a contrarian play before those plans fully materialize, but trading at 21 times forward earnings, its stock still isn't particularly cheap. It also suspended its dividend last month.
Instead of buying Intel in hopes of a longshot turnaround, I'd argue that it's smarter to invest in a better-run semiconductor company with a brighter future. One of those better plays is Broadcom (AVGO +4.69%), which rallied nearly 500% over the past five years.
Why did Broadcom impress the bulls?
Back in 2016, Singapore-based chipmaker Avago Technologies acquired the original Broadcom. The combined company sold a broad range of chips for the mobile device, data center, networking, wireless, data storage, and industrial markets.
The "new" Broadcom expanded into the infrastructure software market by acquiring CA Technologies in 2018, Symantec's enterprise security unit in 2019, and cloud software giant VMware last November. It also redomiciled its business in the U.S. in 2018 so any future acquisitions would face less regulatory scrutiny.
Broadcom's mix of organic growth and aggressive acquisitions impressed the bulls. From fiscal 2018 to fiscal 2023 (which ended last October), its revenue grew at a compound annual rate of 11% as its adjusted earnings per share (EPS) increased at a compound annual rate of 15%. By comparison, Intel's revenue and adjusted EPS declined at compound annual rates of 5% and 26%, respectively, from 2018 to 2023.
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Why is Broadcom the superior chipmaker?
Unlike Intel, which manufactures most of its chips at its own foundries, Broadcom is a "fabless" chipmaker that outsources its manufacturing to third-party foundries like TSMC. It also mainly sells cheaper chips, which are easier to research, develop, and manufacture than Intel's powerful CPUs.
Over the past two years, the rapid growth of the AI market drove many data center operators to upgrade their servers. That trend boosted Broadcom's sales of AI-oriented networking, optical, and custom accelerator chips. In its fiscal 2024, it expects its sales of AI chips to roughly triple and anticipates they will account for nearly a quarter of its revenue.
Intel is also trying to capitalize on the AI boom with its new "AI CPUs," which can natively process more AI tasks without an accelerator chip. However, it's producing those chips at much lower gross margins than its non-AI CPUs. Broadcom, which actually expanded its adjusted gross margin by 110 basis points year over year to 75.8% in the first half of fiscal 2024, isn't sacrificing its margins as it sells more AI chips.
Lastly, Broadcom's expansion of its infrastructure software business reduces its reliance on its top chip customer, Apple, which accounted for a fifth of its total revenue before it acquired VMware. It also reduces its exposure to the cyclical semiconductor market. Broadcom generated 42% of its revenue from its infrastructure software business in its latest quarter, up from 22% a year ago, while the rest came from its semiconductor business. It expects its software unit to grow into about half of its top line, and that expansion should make it a lot more diversified than Intel.
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Broadcom still has a bright future
In its fiscal 2024, analysts expect Broadcom's revenue and adjusted EPS to grow by 44% and 14%, respectively, as it integrates VMware. For its fiscal 2025, they expect its revenue and adjusted EPS to rise by 17% and 28%, respectively, as it fully laps that acquisition. Its stock still looks reasonably valued at 28 times forward earnings, and it pays a decent forward yield of 1.2%.
The outlook for Intel is a lot messier. Analysts expect its revenue and adjusted EPS to decline by 4% and 74%, respectively, in 2024 as it desperately tries to find a path to a turnaround. For 2025, they expect its revenue to rise 8% as its adjusted EPS more than quadruples -- but its recent moves strongly suggest it will miss those expectations.
So for now, it makes more sense to stick with Broadcom's balanced, broadly diversified, and growing business instead of expecting Intel to make an 11th-hour recovery. Intel's business could potentially be saved by a buyout, but any takeover attempt would likely be closely scrutinized by antitrust regulators across the world.
