Even though the ongoing global semiconductor shortage exacerbated by rising Covid-19 cases in China and the Russia-Ukraine war has impacted several industries, the semiconductor industry has been thriving due to the resultant increase in the prices of chips. In addition, Intel’s Pat Gelsinger expects the semiconductor industry to suffer supply shortages until 2024. Furthermore, the passage of the $52 billion CHIPS Act will likely strengthen domestic semiconductor manufacturing and research. According to BlueWeave consulting, the global semiconductor market is estimated to grow at a CAGR of 5.2% between 2022 and 2028. Therefore, both Broadcom Inc. (AVGO) and Texas Instruments Incorporated (TXN) should benefit.
AVGO designs, develops, and supplies semiconductor infrastructure software solutions. It operates through two segments, Semiconductor Solutions; and Infrastructure Software. TXN designs, manufactures, and sells semiconductors to electronics designers and manufacturers worldwide. It operates in two segments, Analog; and Embedded Processing.
AVGO has gained 5.9% over the past six months, while TXN has delivered negative returns. Also, AVGO’s 20.6% gains over the past nine months compare to TXN’s negative returns. Moreover, AVGO is the clear winner with 33.3% gains versus TXN’s negative returns in terms of the past year’s performance.
Click here to checkout our Semiconductor Industry Report for 2022
But which of these two stocks is a better buy now? Let’s find out.
Latest Developments
On April 12, 2022, AVGO announced sample availability of its complete end-to-end chipset solutions for the Wi-Fi 7 ecosystem. Vijay Nagarajan, vice president of marketing for the Wireless Communications and Connectivity Division at AVGO, said, "Broadcom is once again leading the next generation of Wi-Fi with a full suite of Wi-Fi 7 ecosystem solutions. Our Wi-Fi 7 products and diverse customer partnerships continue the accelerated momentum created by the one billion Wi-Fi 6/6E chips that Broadcom has shipped over the past three years.”
On April 28, 2022, the board of directors of TXN declared a quarterly cash dividend of $1.15 per share of common stock, payable May 17, 2022, to stockholders of record on May 9, 2022.
Recent Financial Results
AVGO’s revenue increased 16% year-over-year to $7.71 billion for the fiscal first quarter ended January 30, 2022. The company’s adjusted EBITDA grew 22.3% year-over-year to $4.82 billion, while its non-GAAP net income came in at $3.74 billion, representing a 25.8% year-over-year increase. Also, its non-GAAP EPS came in at $8.39, up 26.9% year-over-year.
TXN’s revenue increased 14% year-over-year to $4.91 billion for the fiscal first quarter ended March 31, 2022. The company’s operating profit grew 32% year-over-year to $2.56 billion, while its net income came in at $2.20 billion, representing a 26% year-over-year increase. Also, its EPS came in at $2.35, up 26% year-over-year.
Past and Expected Financial Performance
AVGO’s revenue and EBIT grew at CAGRs of 10.2% and 21.5%, respectively, over the past three years. Analysts expect AVGO’s revenue to increase 16.4% in fiscal 2022 and 6.2% in fiscal 2023. The company’s EPS is expected to grow 26.8% in fiscal 2022 and 8.8% in fiscal 2023. Moreover, its EPS is expected to grow at a rate of 14.7% per annum over the next five years.
On the other hand, TXN’s revenue and EBIT grew at CAGRs of 6.7% and 14.3%, respectively, over the past three years. The company’s revenue is expected to increase 5.2% in fiscal 2022 and 2.6% in fiscal 2023. Its EPS is expected to grow 7.6% in fiscal 2022 and 1.5% in fiscal 2023. Also, TXN’s EPS is expected to grow at a rate of 10% per annum over the next five years.
Profitability
AVGO’s trailing-12-month revenue is 1.50 times what TXN generates. AVGO is also more profitable, with a gross profit margin and levered FCF margin of 74.48% and 41.75% compared to TXN’s 68.68% and 23.16%, respectively.
However, TXN’s ROE, ROA, and ROTC of 67.96%, 27.05%, and 31.83% are higher than AVGO’s 33.32%, 8.23%, and 9.62%, respectively.
Valuation
In terms of forward non-GAAP P/E, TXN is currently trading at 18.49x, 13% higher than AVGO’s 16.37x. Moreover, TXN’s forward non-GAAP PEG ratio of 2.30x is 127.7% higher than AVGO’s 1.01x.
So, AVGO is relatively affordable here.
POWR Ratings
AVGO has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, TXN has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
AVGO has a B grade for Growth and Sentiment, consistent with analysts’ expectations that its EPS and revenue will increase exponentially. On the other hand, TXN has a C grade for Growth and Sentiment, in sync with analysts’ expectations that its EPS and revenue will grow moderately.
Of the 95 stocks in the B-rated Semiconductor & Wireless Chip industry, AVGO is ranked #9. In comparison, TXN is ranked #44.
Beyond what I’ve stated above, we have also rated the stocks for Stability, Momentum, Value, and Quality. Click here to view all the AVGO ratings. Also, get all the TXN ratings here.
The Winner
The semiconductor space is booming with the rising demand for chips and governments’ progressive policies. While both AVGO and TXN are expected to benefit, it is better to bet on AVGO now because of its lower valuation, higher profit margin, and better growth prospects.
Our research shows that 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.
AVGO shares were unchanged in after-hours trading Wednesday. Year-to-date, AVGO has declined -14.20%, versus a -17.05% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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