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The semiconductor industry is thriving as it powers everything from smartphones, computers, and automobiles to advanced medical devices. Growing trends such as 5G, artificial intelligence (AI), and the Internet of Things (IoT) will continue to boost this demand. This is why investors increasingly view semiconductor companies as a promising investment opportunity.
The semiconductor industry is very competitive. Only companies that can stay ahead of the competition while maintaining their technological leadership will survive. Here, we have two standout semiconductor companies that can not only survive but thrive as the AI market grows.
The Case for Broadcom
Broadcom (AVGO), with a market capitalization of $726.9 billion, is more than just a semiconductor company; it also provides infrastructure software solutions. AVGO provides products for a variety of markets, including data centers, networking, broadband, wireless communication, and storage.
Broadcom recently announced a 10-for-1 forward stock split of its common stock in the second quarter of fiscal 2024 to make it more accessible to investors. So far, AVGO stock has gained 41.7% year-to-date, outperforming the tech-heavy Nasdaq Composite's ($NASX) 14.5% gain.
Broadcom has consistently demonstrated strong revenue growth, thanks to its diverse product portfolio and smart and timely acquisitions. The semiconductor business accounted for 58% of total revenue in the second quarter, with the infrastructure software segment accounting for the rest.
The Semiconductor Solutions segment's revenue increased 6% to $7.2 billion, while infrastructure software revenue surged 175% year on year to $5.28 billion. In 2023, the company spent $61 billion to acquire the cloud software company VMware to strengthen its infrastructure software segment.
Management specified that growing AI demand and the contributions of the VMware acquisition led to this performance. In fiscal 2024, the company expects to generate $51 billion in revenue, a 42% increase over fiscal 2023, led by a contribution from VMware.
Broadcom's total revenue jumped 43% to $12.5 billion, while adjusted diluted earnings rose by 6.2% to $10.96 per share. Broadcom is also an income stock, known for paying out consistent dividends. It pays a forward dividend yield of 1.34%, which is slightly lower than the tech sector average of 1.37%. In the fourth quarter of fiscal 2023, Broadcom increased its quarterly dividend by 14% to $5.25 per share.
Broadcom has a history of increasing dividend payouts on an annual basis, specifically over the last 14 years. Its forward payout ratio of 36.5% is low, indicating room for dividend growth. The company generated $5.3 billion of free cash flow (FCF), which should allow it to continue paying dividends and pay off its debts, as its debt-to-equity ratio stands quite high at 1.06.
Broadcom will report third-quarter earnings on Sept. 5. Analysts expect AVGO to report a GAAP (generally accepted accounting principles) profit of $0.56 per diluted share, with revenue rising 42.2% to $12.96 million.
Analysts expect AVGO's earnings to rise by 12.4% in fiscal 2024 and 27.6% in fiscal 2025. Trading at 25 times forward 2025 earnings, AVGO appears to be a reasonable semiconductor stock to buy right now, given the explosive demand for AI solutions.
What Does Wall Street Say About Broadcom Stock?
On Wall Street, AVGO stock is a “strong buy” overall. Out of the 32 analysts that cover the stock, 29 rate it a “strong buy,” and three recommend a “hold.”
Based on AVGO’s mean target price of $190.51, the stock has a potential upside of 21% from current levels. Plus, its high price estimate of $240 indicates the stock could rise as high as 52.6% in the next 12 months.
Broadcom has a strong track record of revenue growth, profitability, and shareholder returns. Its focus on high-growth areas like 5G, data centers, and infrastructure software positions it well for the future. With a balanced mix of growth and income potential, Broadcom is a great semiconductor stock to buy now.
The Case For Qualcomm
Qualcomm Incorporated (QCOM) is a leading global technology company best known for its innovations in wireless communications, particularly the development of 3G, 4G, and 5G technologies.
Valued at $188.7 billion, QCOM stock has gained 14.9% YTD, roughly in line with the Nasdaq's gain.
Qualcomm's revenue comes primarily from two segments: Qualcomm CDMA Technologies (QCT), including the company's semiconductor business, which grew 12% in Q3. Its other segment, Qualcomm Technology Licensing (QTL), which licenses its extensive patent portfolio, increased 3% year over year.
After struggling for some time, the smartphone market is finally recovering, thanks to AI. In the quarter, handset chip sales increased by 12% to $5.8 billion. Automotive chip sales increased by 87%, while IoT chip sales dropped by 8%.
Total revenue increased 11% year on year to $9.4 billion, while adjusted earnings per share (EPS) rose by 25% to $2.33 per share.
Qualcomm is launching its next-generation AI products, the Snapdragon X series for personal computers and the Snapdragon 8 Gen 3 for smartphones, which could continue to generate revenue in the future. Analysts who cover Qualcomm stock expect consistent earnings growth over the next two years. Adjusted earnings per share are expected to rise 19% in fiscal 2024 and 11.9% in fiscal 2025. Qualcomm, trading at 15 times forward 2025 earnings, appears to be a cheap semiconductor stock to buy right now.
Qualcomm also pays a dividend with an attractive yield of 2.01%, which is higher than the industry average. The company has increased its dividend for the last 22 years. Furthermore, Qualcomm is on the verge of becoming a Dividend Aristocrat, a title given to S&P 500 companies that have increased their dividends for 25 consecutive years. Its low forward payout ratio of 30.4% indicates that dividends may increase in the future. Qualcomm distributed $949 million in dividends in Q3.
What Does Wall Street Say About Qualcomm Stock?
Overall, Wall Street rates QCOM stock a “moderate buy.” Out of the 29 analysts that cover the stock, 16 rate it a “strong buy,” one rates it a “moderate buy,” 11 rate it a “hold,” and one rates it a “strong sell.”
Based on its average target price of $213.99, QCOM stock has an upside potential of 28.8% over current levels. Its high target price of $270 implies a potential upside of 62.5% in the next 12 months.
Qualcomm's leadership in 5G technology, expansion into new markets such as automotive and IoT, and its profitable licensing business position the company well for the future.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
