Renowned semiconductor company Advanced Micro Devices, Inc.’s (AMD) shares have declined 60% in price year-to-date and 44.9% over the past year to close the last trading session at $57.63. It is currently trading 65% below its 52-week high of $164.46, which it hit on November 30, 2021.
The PC demand slowdown has led AMD to lower its revenue guidance for the third quarter. The company now expects its revenue to be around $5.6 billion, down from the previously estimated $6.7 billion.
Revenue will now reflect a growth of 29% as compared to the previously expected 55%. Also, the adjusted gross margin is now expected at 50%, down from the previously estimated 54% due to lower client segment revenues.
Given the company’s weak growth prospects, AMD is rated a D (Sell) in our proprietary POWR Ratings system.
Therefore, investors should consider Broadcom Inc. (AVGO) instead, given its better growth prospects.
AVGO surpassed its EPS and revenue estimates in the last reported quarter. Its EPS was 1.9% higher than analyst estimates, and its revenue was 0.7% higher than consensus estimates. AVGO’s President and CEO Hock Tan said, “Broadcom’s record third-quarter results were driven by robust demand across cloud, service providers, and enterprise.”
Kirsten Spears, the CFO of AVGO, said, “We generated $4.30 billion in free cash flow and are expecting free cash flow to be strong in the fourth quarter. We remain committed to return excess cash to shareholders, and in the third quarter, we returned $3.20 billion to shareholders, including $1.70 billion of cash dividends and $1.50 billion of share repurchases.”
For the fourth quarter, AVGO estimates its revenue to rise 20% over the prior year period to $8.90 billion. AVGO expects its adjusted EBITDA to be 63% of the projected revenue. Furthermore, it expects its networking and server storage revenues to grow 30% and 45% from the year-ago period.
AVGO’s stock has declined 10.8% over the past three months to close the last trading session at $430.76. However, Wall Street analysts expect the stock to hit $674 in the near term, representing an upside of 56.5%.
Here’s what could influence AVGO’s performance in the upcoming months:
Recent Acquisition
On May 26, 2022, AVGO announced the acquisition of VMware, Inc. (VMW) for approximately $61 billion.
Tom Krause, President of the Broadcom Software Group, said, “VMware has long been recognized for its enterprise software leadership, and through this transaction, we will provide customers worldwide with the next generation of infrastructure software. VMware’s platform and Broadcom’s infrastructure software solutions address different but important enterprise needs, and the combined company will be able to serve them more effectively and securely.”
Robust Financials
AVGO’s net revenue increased 24.9% year-over-year to $8.46 billion for the third quarter ended July 31, 2022. The company’s adjusted EBITDA increased 30.4% year-over-year to $5.37 billion.
Also, its adjusted net income increased 35.7% year-over-year to $4.24 billion. In addition, its adjusted EPS came in at $9.73, representing an increase of 39.8% year-over-year.
Favorable Analyst Estimates
AVGO’s EPS for fiscal 2022 and 2023 is expected to increase 33.5% and 8.7% year-over-year to $37.40 and $40.64. Its revenue for fiscal 2022 and 2023 is expected to increase 20.8% and 6% year-over-year to $33.17 billion and $35.17 billion. It surpassed consensus EPS estimates in each of the trailing four quarters.
High Profitability
In terms of the trailing-12-month gross profit margin, AVGO’s 75.13% is 49% higher than the 50.43% industry average. Likewise, its 57.33% trailing-12-month EBITDA margin is significantly higher than the industry average of 12.27%.
Furthermore, the stock’s 40.69% trailing-12-month EBIT margin is significantly higher than the industry average of 7.42%.
Mixed Valuation
In terms of forward non-GAAP P/E, AVGO's 11.52x is 30.7% lower than the 16.62x industry average. Its forward EV/EBIT of 10.19x is 29.7% lower than the 14.50x industry average.
However, the stock's 6.23x forward EV/S is 151.8% higher than the 2.48x industry average. In addition, its 5.26x forward P/S is 124% higher than the 2.35x industry average.
POWR Ratings Show Promise
AVGO has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. AVGO has a B grade for Growth, in sync with favorable analyst estimates.
It has an A grade for Quality, consistent with its high profitability. Its mixed valuation justifies its C grade for Value.
AVGO is ranked #8 out of 91 stocks in the B-rated Semiconductor & Wireless Chip industry. Click here to access AVGO’s Momentum, Stability, and Sentiment ratings.
Bottom Line
AVGO delivered impressive top-and-bottom-line results in the last quarter. Moreover, analysts are bullish on the company’s revenue and earnings growth prospects.
Given its robust financials, solid growth prospects, and high profitability, AVGO could be a better investment than AMD.
How Does Broadcom Inc. (AVGO) Stack Up Against its Peers?
AVGO has an overall POWR Rating of B, equating to a Buy rating. You might want to consider investing in the following Semiconductor & Wireless Chip stocks with an A (Strong Buy) or B (Buy) rating such as STMicroelectronics N.V. (STM), Advantest Corporation (ATEYY), and Cirrus Logic, Inc. (CRUS).
AVGO shares were trading at $433.10 per share on Wednesday afternoon, up $2.34 (+0.54%). Year-to-date, AVGO has declined -33.37%, versus a -23.67% 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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