The COVID-19 pandemic had created major challenges for the semiconductor chip industry leading to a demand-supply imbalance. Governments and companies have been investing heavily to boost chip production worldwide to address the ongoing shortage.
The Semiconductor Industry Association (SIA) announced that the global semiconductor industry’s sales came in at a record high of $555.90 billion in 2021, up 26.2% from the prior year. According to Fortune Business Insights, the global semiconductor market is expected to grow at a CAGR of 8.6% over the next six years to reach $452.25 billion by 2028. However, the hostilities between Ukraine and Russia may create supply disruptions in chip manufacturing in the near term, as Ukraine supplies more than 90% of semiconductor neon to the U.S. In comparison, Russia supplies 35% of palladium used in chip manufacturing.
Today I am going to analyze and compare NVIDIA Corporation (NVDA) and Broadcom Inc. (AVGO) to determine which chip stock is currently a better investment. NVDA is an artificial intelligence computing company. It operates through the Graphics and Compute & Networking segments. Its Graphics segment includes its GeForce graphics processing unit (GPU), Quadro/NVIDIA RTX GPUs, and automotive platforms for infotainment systems. Its Compute & Networking segment includes Data Center platforms and systems for artificial intelligence, high-performance computing, and accelerated computing. AVGO designs, develops, and supplies a range of semiconductor and infrastructure software solutions. It operates through the semiconductor solutions and infrastructure software segments.
NVDA’s shares have gained 72% in price over the past year, while AVGO has gained 30% over the same period.
Click here to checkout our Semiconductor Industry Report for 2022
Latest Developments
On February 16, 2022, NVDA announced its multi-year strategic partnership with Jaguar Land Rover starting 2025 to jointly develop and deliver the next-generation automated driving systems plus AI-enabled services and experiences. The vehicles would be built on NVIDIA DRIVE software-defined platform delivering a broad spectrum of active safety, automated driving, driver assistance, and parking systems.
On February 24, 2022, AVGO announced that its PCIe Gen 5.0 portfolio is setting the base for the ecosystem to build high-performance, next-generation servers. Its PCIe Gen 5.0 SerDes, switches, and custom silicon products are available to OEMs, ODMs, and cloud providers, and are actively being tested and demonstrated for wide-scale interoperability. VP and General Manager of the Data Center Solutions Group at AVGO, Jas Tremblay, said, “Our industry-leading PCIe Gen 5.0 portfolio ensures the ecosystem has the platforms needed to enable new applications such as AI/ML and cloud computing where large amounts of data are moving at an increasingly fast, real-time pace.”
Recent Financial Results
NVDA’s revenue increased 53% year-over-year to $7.64 billion for the fourth quarter ended January 30, 2022. The company’s non-GAAP net income increased 71% year-over-year to $3.35 billion. Also, its non-GAAP EPS came in at $1.32, representing an increase of 69% year-over-year. In addition, its non-GAAP operating income increased 76% year-over-year to $3.67 billion.
AVGO’s revenue for the fiscal first quarter ended January 30, 2022, increased 16% year-over-year to $7.70 billion. The company’s non-GAAP net income increased 25.8% year-over-year to $3.74 billion. In addition, its non-GAAP EPS came in at $8.39, representing an increase of 26.9% year-over-year. Also, its adjusted EBITDA increased 22.2% year-over-year to $4.81 billion.
Past and Expected Financial Performance
NVDA’s revenue has grown at a 31.9% CAGR over the past three years. Its net income has grown at a CAGR of 33% CAGR over the past three years. Analysts expect NVDA’s revenue to increase 29% in the current year and 17.2% next year. The company’s EPS is expected to grow 26.4% in the current year and 19.8% next year. Moreover, its EPS is expected to grow at 30.1% per annum over the next five years.
On the other hand, AVGO’s revenue and net income grew at a CAGR of 10.1% and 6.4%, respectively, over the past three years. Analysts expect AVGO’s revenues to increase 15.5% in the current year and 6.3% next year. The company’s EPS is expected to grow 25.4% in the current year and 9.3% next year. Moreover, the company’s EPS is projected to grow at a rate of 14.7% per annum over the next five years.
Profitability
AVGO is more profitable in terms of its gross profit margin and EBITDA margin of 74.5% and 54.9%, respectively, compared to NVDA’s 64.9% and 41.6%.
Moreover, AVGO’s levered FCF margin of 41.6% is higher than NVDA’s 25%.
Valuation
In terms of forward non-GAAP P/E, NVDA is currently trading at 38.44x, 137.1% higher than AVGO, which is trading at 16.21x. Moreover, NVDA’s forward non-GAAP PEG of 1.58x is 54.9% higher than AVGO’s 1.02x. NVDA’s forward EV/EBITDA of 34.94x is 165% higher than AVGO’s 13.18x.
Thus, AVGO is more affordable here.
POWR Ratings
NVDA has an overall rating of C, which translates to Neutral in our proprietary POWR Ratings system. On the other hand, AVGO has an overall rating of B, which equates to a Strong Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Both stocks have an A grade for Sentiment, in sync with the favorable earnings and revenue growth estimates.
AVGO has a Value grade of C. This is justified, as the stock’s 13.54x forward EV/EBIT multiple is 13.8% lower than the 15.72x industry average. In comparison, NVDA has a D grade for Value. This is justified as its EV/EBIT of 31.74x is 101.8% higher than the industry average.
In the 97-stock, B-rated Semiconductor & Wireless Chip industry, AVGO is ranked #10, while NVDA is ranked #64.
Beyond what I’ve stated above, we have also rated the stocks for Growth, Momentum, Stability, and Quality. Click here to view all the NVDA ratings. Also, get all the AVGO’s ratings here.
The Winner
The global chip industry is expected to witness solid growth in the coming years, benefiting popular chip stocks NVDA and AVGO. However, AVGO’s lower valuations and higher profit margins make it a better bet now.
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 other top-rated stocks in the Semiconductor & Wireless Chip industry here.
NVDA shares were trading at $230.80 per share on Wednesday afternoon, up $15.66 (+7.28%). Year-to-date, NVDA has declined -21.51%, versus a -9.91% 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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