Superior Semiconductor Pick: AMD versus Broadcom
The semiconductor sector is a lucrative investment opportunity right now. 2024 saw a remarkable 19% year-on-year increase in global sales, with an expectation of further growth in 2025. The industry is expected to reach nearly $700 billion in 2025, up from its 2024 figure of $627 billion, as per the World Semiconductor Trade Statistics.
The expansion of the artificial intelligence market is likely to drive further growth within this sector. For those looking to capitalize on this, two promising semiconductor stocks to consider are Advanced Micro Devices (AMD) and Broadcom (AVGO).
Both companies are experiencing strong sales due to the increased demand for AI-related products from customers. However, if one must choose between the two, here's an analysis of AMD and Broadcom to help make an informed decision.
AMD's AI focus
AMD excels in the production of semiconductors for accelerated computing. This type of technology uses dedicated components to enhance the speed and efficiency of data-intensive tasks, such as AI.
AMD anticipates a burgeoning demand for accelerated computing in the coming years, as not only AI but also numerous data-intensive applications, such as 5G wireless networks, require upgrades to support this technology.
In its fiscal third quarter, which ended on Sept. 28, AI demand fueled AMD's sales to a record $6.8 billion, marking a 18% year-over-year increase. AMD's semiconductor products are highly sought-after due to their ability to boost the performance of AI systems in data centers. Consequently, AMD's data center sales reached a record $3.5 billion, experiencing a 122% year-over-year surge.
AMD plans to expand its successful data center business through acquisitions, such as its intent to acquire ZT Systems by the first half of 2025. ZT Systems assists clients in implementing AI infrastructure.
Due to the demand for accelerated computing, AMD estimates its Q4 revenue to surpass Q3's record $6.8 billion, reaching an impressive $7.5 billion – equivalent to a double-digit increase over the prior year's $6.2 billion.
Broadcom's success factors
CEO Hock Tan considered 2024 to be a transformative year for Broadcom, fueled by two primary drivers: AI and the acquisition of VMware.
VMware, a company Broadcom acquired in November 2023, provides virtualization software enabling IT organizations to run multiple operating systems on a single server. By offering this capability, businesses can create their private cloud computing environment instead of relying on public ones owned by conglomerates, such as Microsoft.
Broadcom's infrastructure segment, which includes VMware, saw revenue increase by a staggering 196% year-over-year to $5.8 billion in its fiscal fourth quarter, ending Nov. 3.
For AI, Broadcom's AI-related revenue expanded 220% in fiscal 2024, from $3.8 billion in 2023 to $12.2 billion. This AI demand propelled the company's full-year sales to a record $51.6 billion, representing a 44% increase over fiscal 2023.
Broadcom's impressive sales performance allowed it to generate a substantial free cash flow of $5.5 billion in Q4, up from $4.7 billion in the previous year. As a result, Broadcom raised its dividend by 11% to $0.59 per share.
Deciding between AMD and Broadcom stocks
Both AMD and Broadcom exhibit exceptional semiconductor companies, as demonstrated by their robust sales growth. In fact, investing in both is ideal, but if one must choose only one, consideration of valuation using the price-to-earnings (P/E) ratio is essential.
The P/E ratio reflects the amount investors are willing to spend on a dollar's worth of earnings. As of the end of 2024, Broadcom's share price reached a 52-week high of $251.88 on Dec. 16, resulting in a surge in its P/E ratio. Consequently, AMD appears to offer a better value at present.
Additionally, AMD boasts a comparative advantage over Broadcom in terms of risk. Broadcom's sales are heavily reliant on the Chinese market, with approximately one-third of its sales to Chinese clients. In contrast, AMD's exposure to China stands at around 15% of its sales. While both companies have thriving AI businesses, AMD's more attractive valuation and reduced exposure to China risk place it ahead as the preferred semiconductor stock to invest in at this time. Nevertheless, it's worth keeping an eye on Broadcom as a potential future buy when market conditions are more favorable.
Investors looking to capitalize on the growth of the semiconductor sector might consider diversifying their portfolio with stocks such as AMD and Broadcom. AMD's strong focus on accelerated computing, fueled by increasing demand for AI and data-intensive applications, led to a record $6.8 billion in sales during its fiscal third quarter.
Investors contemplating between AMD and Broadcom should consider the companies' valuations using the price-to-earnings (P/E) ratio. As of the end of 2024, AMD appears to offer a better value, with a comparative advantage in terms of risk, as its sales exposure to China is lower than Broadcom's.
