Broadcom Inc. (AVGO) and NVIDIA Corporation (NVDA) are two prominent players in the semiconductor industry. AVGO designs, develops, and supplies a range of analog and digital semiconductor connectivity solutions and infrastructure software solutions.
NVDA designs and manufactures computer graphics processors, chipsets, and related multimedia software in gaming, professional visualization, data center, and automotive markets. Its products are sold to OEMs, ODMs, system builders, add-in board manufacturers, retailers/distributors, Internet and cloud service providers, mapping companies, and other ecosystem participants.
The ongoing war between Russia and Ukraine and growing tensions related to Taiwan between China and the United States have been worsening the global chip shortage lately. However, substantial policy support and corporate investments are expected to boost domestic chip production. Therefore, the industry is expected to benefit from the surging demand for chips in the long run.
Moreover, chipmakers are developing advanced chips with lower latency and power consumption to drive device efficiency. The global semiconductor market is expected to grow at a 9.2% CAGR to $893.10 billion by 2029. Therefore, both AVGO and NVDA should benefit.
AVGO is a winner with 5.8% gains over the past year versus NVDA’s 14.9% loss. But which of these stocks is a better pick now? Let’s find out.
Latest Developments
On May 26, 2022, AVGO announced to acquire VMware, Inc. (VMW), a cloud computing and virtualization technology company that virtualizes the x86 architecture, in a cash-and-stock transaction of approximately $61 billion and will assume $8 billion of VMW’s net debt.
AVGO’s Broadcom Software Group will rebrand and operate as VMware, incorporating its existing infrastructure and security software solutions and helping accelerate the company’s growth opportunities. This should add approximately $8.5 billion of pro forma EBITDA from the acquisition within three years post-closing.
On May 23, 2022, Taiwan’s leading computer makers announced to release of the first wave of systems powered by the NVIDIA Grace CPU Superchip and Grace Hopper Superchip for a wide range of workloads spanning digital twins, AI, high-performance computing, cloud graphics, and gaming.
The Grace-powered systems will join x86 and other Arm-based servers to offer customers a broad range of choices for achieving high performance and efficiency in their data centers. This will help NVDA gain wide market reach in the coming months.
Recent Financial Results
AVGO’s net revenue for its fiscal 2022 second quarter ended May 1, 2022, increased 22.6% year-over-year to $8.10 billion. The company’s non-GAAP gross profit came in at $6.19 billion for the quarter, up 24.9% from the prior-year period.
Its non-GAAP operating income came in at $4.94 billion, representing a 29.9% rise from the prior-year period. While its non-GAAP net income increased 34.2% year-over-year to $4 billion, its non-GAAP EPS increased 37% to $9.07. As of May 1, 2022, the company had $9.01 billion in cash and cash equivalents.
For the fiscal 2023 first quarter ended May 1, 2022, NVDA’s revenue increased 46.4% year-over-year to $8.29 billion. The company’s non-GAAP gross profit came in at $5.56 billion, representing a 48.5% rise from the prior-year period. Its non-GAAP income from operations came in at $3.96 billion for the quarter, increasing 54.7% from the prior-year period.
NVDA’s non-GAAP net income came in at $3.44 billion, up 48.9% from the year-ago period. Its non-GAAP EPS came in at $1.36, indicating a 49.5% year-over-year improvement. As of May 1, 2022, the company had $3.89 billion in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, AVGO’s EBITDA, net income, and EPS have increased at a CAGR of 18.4%, 37%, and 39%. AVGO’s EPS is expected to increase 31.6% year-over-year in fiscal 2022, ending October 31, 2022, and 9.4% in fiscal 2023. Its revenue is expected to grow 19.9% in fiscal 2022 and 5.9% in fiscal 2023.
Over the past three years, NVDA’s EBITDA, net income, and EPS have grown at a CAGR of 58.2%, 42.2%, and 41.2%. Analysts expect NVDA’s EPS to grow 22.3% year-over-year in fiscal 2023, ending January 31, 2023, and 18.8% in fiscal 2024. Its revenue is expected to grow 25.3% year-over-year in fiscal 2023 and 16.7% in fiscal 2024.
Valuation
In terms of non-GAAP forward PEG, NVDA is currently trading at 1.10x, 46.7% higher than AVGO’s 0.75x. In terms of forward EV/Sales, AVGO’s 7.04x compares with NVDA’s 11.48x.
Profitability
AVGO’s trailing-12-month revenue is higher than NVDA’s. Moreover, AVGO is more profitable, with a 56.2% EBITDA margin versus NVDA’s 42.4%.
Furthermore, AVGO’s gross profit margin and levered free cash flow margin of 74.9% and 40.3% compare with NVDA’s 65.3% and 27.1%, respectively.
POWR Ratings
While AVGO has an overall A grade, which translates to Strong Buy in our proprietary POWR Ratings system, NVDA has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
AVGO has been graded an A for Quality, consistent with their higher-than-industry profitability ratios. AVGO’s 40.3% trailing-12-month levered free cash flow margin is 321.8% higher than the 9.6% industry average. NVDA has a B grade for Quality, in sync with its relatively lower profit margins.
AVGO has a C grade for Value, which is in sync with its slightly higher-than-industry valuation ratios. AVGO’s 13.75x trailing-12-month EV/EBITDA is 3.1% higher than the 13.34x industry average. NVDA’s D grade for Value reflects its overvaluation. Its 31.05x trailing-12-month EV/EBITDA is 132.8% higher than the 13.34x industry average.
Of the 96 stocks in the B-rated Semiconductor & Wireless Chip industry, AVGO is ranked #6, while NVDA is ranked #77.
Beyond what we have stated above, our POWR Ratings system has graded AVGO and NVDA for Growth, Momentum, Stability, and Sentiment. Get all AVGO ratings here. Also, click here to see the additional POWR Ratings for NVDA.
The Winner
Surging demand and increasing investments to enhance chip production should benefit prominent chipmakers AVGO and NVDA. However, relatively lower valuation and higher profitability make AVGO a better buy here.
Our research shows that the odds of success increase if one invests in stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry.
AVGO shares were trading at $498.65 per share on Monday afternoon, up $1.47 (+0.30%). Year-to-date, AVGO has declined -24.55%, versus a -22.73% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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