In this piece, I evaluated two semiconductor and wireless chip stocks, Broadcom Inc. (AVGO) and Intel Corporation (INTC), to determine which has better return potential. Based on a fundamental comparison of these stocks, I find AVGO a better pick for the reasons explained throughout this article.
Despite a slowdown during the second half of 2022, global semiconductor sales reached the highest ever, rising 3.3% year-over-year to $574.10 billion. Sales of chips by U.S. semiconductor companies last year amounted to $275 billion, or 48% of the global market.
However, the short-term outlook of the semiconductor market looks uncertain. The World Semiconductor Trade Statistics (WSTS) projects global semiconductor sales to decline 10.3% year-over-year to $515.10 billion in 2023. However, chip sales are likely to rebound strongly, with a growth of 11.8% year-over-year to $576 billion in 2024.
AVGO surpassed the consensus EPS and revenue estimates in the second quarter. Its EPS beat the consensus estimate by 1.8%, while its revenue was 0.3% above analyst estimates. On the other hand, INTC’s loss per share in the first quarter came marginally higher than the $0.65 consensus estimate. However, the company’s revenue topped analyst estimates by 5.3%.
AVGO’s President and CEO Hock Tan said, “Broadcom’s second-quarter results were driven by demand for next-generation technologies from hyperscale, while enterprise and service providers continued to sustain. Our third quarter outlook projects year-over-year growth, reflecting continued leadership in networking as we support a measured ramp into large-scale AI networks.”
For the third quarter, AVGO expects its revenue to be approximately $8.85 billion, while its adjusted EBITDA is expected to be about 65% of the projected revenue. CEO Pat Gelsinger commented on INTC’s first-quarter performance, “We delivered solid first-quarter results, representing steady progress with our transformation.”
“We hit key execution milestones in our data center roadmap and demonstrated the health of the process technology underpinning it. While we remain cautious on the macroeconomic outlook, we are focused on what we can control as we deliver on IDM 2.0: driving consistent execution across process and product roadmaps and advancing our foundry business to best position us to capitalize on the $1 trillion market opportunity ahead,” he added.
INTC expects its revenue for the second quarter to be between $11.5 billion and $12.5 billion. Its non-GAAP gross margin is expected to be 37.5%. Additionally, its non-GAAP loss per share is projected to be $0.04.
When it comes to price performance, AVGO is the clear winner. AVGO stock has delivered positive returns in all time frames. In addition, AVGO has gained 65.6% over the past year, compared to INTC’s 11.8% decline.
However, here are the reasons I think AVGO could perform better in the near term:
Recent Financial Results
AVGO’s net revenue for the second quarter ended April 30, 2023, increased 7.8% year-over-year to $8.73 billion. Its non-GAAP net income rose 12.2% year-over-year to $4.49 billion. Its non-GAAP EPS came in at $10.32, representing an increase of 13.8% year-over-year. In addition, its adjusted EBITDA increased 11.3% year-over-year to $5.69 billion. Also, its cash flow from operations rose 6.1% year-over-year to $4.50 billion.
For the fiscal first quarter ended April 1, 2023, INTC’s net revenue declined 36.2% year-over-year to $11.72 billion. Its non-GAAP gross margin declined 53.9% year-over-year to $4.49 billion. The company’s non-GAAP operating loss came in at $294 million, compared to a non-GAAP operating income of $4.24 billion in the prior-year quarter.
Its non-GAAP net loss attributable to INTC came in at $169 million, compared to a non-GAAP net income of $3.58 billion in the year-ago period. In addition, its non-GAAP loss per share came in at $0.04, compared to a non-GAAP net income of $0.87 in the prior-year quarter.
Expected Financial Performance
Analysts expect AVGO’s EPS for fiscal 2023 and 2024 to increase 11.8% and 7.9% year-over-year to $42.07 and $45.38. Its fiscal 2023 and 2024 revenue is expected to increase 7.8% and 6.8% year-over-year to $35.78 billion and $38.20 billion. For the quarter ending July 31, 2023, AVGO’s EPS and revenue are expected to increase 7.3% and 4.7% year-over-year to $10.44 and $8.86 billion, respectively.
INTC’s EPS and revenue for fiscal 2023 are expected to decline 77.4% and 18.5% year-over-year to $0.42 and $51.39 billion, respectively. On the other hand, its EPS and revenue for fiscal 2024 are expected to increase 324.2% and 13.4% year-over-year to $1.76 and $58.26 billion, respectively.
Its EPS for the quarter ending June 30, 2023, is expected to be negative. Moreover, its revenue for the same quarter is expected to decline 21.1% year-over-year to $12.09 billion.
Profitability
INTC’s trailing-12-month revenue is 1.6 times what AVGO generates. However, AVGO is more profitable, with an EBIT margin and levered FCF margin of 45.31% and 39%, compared to INTC’s negative 3.90% and 18.06%, respectively. Also, AVGO’s asset turnover of 0.49x compares to INTC’s 0.31x.
Valuation
In terms of forward EV/Sales, AVGO is currently trading at 10.26x, 226.8% higher than INTC’s 3.14x. AVGO’s trailing-12-month Price/Sales ratio of 9.68x is 301.7% higher than INTC’s 2.41x.
On the other hand, AVGO’s 16.11x forward EV/EBITDA is 5.8% lower than INTC’s 17.11x. In addition, its 1.42x forward non-GAAP PEG is 93.6% lower than INTC’s 22.34x.
POWR Ratings
AVGO has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, INTC has an overall rating of D, translating to a Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. AVGO has a B grade for Sentiment, consistent with its favorable analyst estimates. On the other hand, INTC’s mixed analyst estimates justify its C grade for Sentiment.
Additionally, AVGO has an A grade for Quality, in sync with its high profitability. However, INTC has a C grade for Quality, consistent with its mixed profitability.
Of the 91 stocks in the Semiconductor & Wireless Chip industry, AVGO is ranked #15, while INTC is ranked #75 in the same industry.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Stability. Click here to view AVGO’s ratings. Get all the ratings of INTC here.
The Winner
Although the semiconductor industry’s short-term prospects look uncertain, semiconductor sales are expected to rise sharply in 2024. The growing adoption of emerging technologies like artificial intelligence (AI), machine learning (ML), Internet of Things (IoT) are driving the demand for semiconductor chips. Chip designers like AVGO and chip manufacturers like INTC benefit from the growing demand for semiconductor chips.
Despite the uncertain macroeconomic environment, AVGO expects strong top-line growth in the third quarter. Its networking revenues are expected to grow nearly 20% year-over-year in the third quarter. The server storage connectivity revenues will be in the low single digits year-over-year. Broadband revenues are expected to grow in moderate to low-single digit percent year-over-year.
The company expects its enterprise AI computing business to grow from 10% to 25% in 2024. Moreover, the company expects to complete the VMware deal this year.
On the other hand, INTC is focusing on building its chip manufacturing business, but it faces stiff competition from Taiwan Semiconductor Manufacturing Company Limited (TSM). Luring the top chip designers has turned out to be challenging for INTC. Although the company expects chip manufacturing revenues to be $20 billion next year, the challenges of retaining fabless chip designers and manufacturing chips at a lower cost remain.
Considering these factors, AVGO could be a better choice than INTC.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Semiconductor & Wireless Chip industry here.
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AVGO shares rose $2.15 (+0.26%) in premarket trading Monday. Year-to-date, AVGO has gained 49.28%, versus a 14.07% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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