AMD vs. Broadcom: The Better AI-Chip Stock to Buy After the Sell-Off
AMD and Broadcom are two AI chip stocks that have fallen after a brutal week for chip stocks. Both companies are executing well, but AMD's price assumes it will continue to gain share in AI chips for years to come, while Broadcom offers faster growth and a cheaper stock.
Intelligence analysis by Llama
The article compares AMD and Broadcom, two AI chip stocks that have fallen after a brutal week for chip stocks. It argues that Broadcom is the better buy due to its faster growth, cheaper stock, and stronger cash generator.
Imagine you're buying a stock in a company that makes special chips for computers. Two companies, AMD and Broadcom, make these chips. AMD's stock is expensive because people think it will keep getting better at making these chips. But Broadcom's stock is cheaper and growing faster. It also makes a lot of money and pays a dividend. So, if you want to buy a stock in a company that makes special chips, Broadcom might be a better choice.
Analysis
A Brutal Week for Chip Stocks Ends with a Bear Market
The PHLX Semiconductor Index has fallen more than 20% from its June peak, and two AI trade flagship names, AMD and Broadcom, have gone down with it. Despite this, both companies are executing well, with AMD's first-quarter results showing a company hitting its stride. Revenue rose 38% year over year to $10.3 billion, led by the data center segment, where revenue climbed 57% to $5.8 billion on strong demand for its EPYC server processors and the continuing ramp of its Instinct AI accelerators.
AMD: Accelerating, and Priced Like It
AMD's first-quarter results showed a company hitting its stride. Revenue rose 38% year over year to $10.3 billion, led by the data center segment, where revenue climbed 57% to $5.8 billion on strong demand for its EPYC server processors and the continuing ramp of its Instinct AI accelerators. Non-GAAP (adjusted) earnings per share rose 43% to $1.37, and free cash flow hit a quarterly record of $2.6 billion. Even the client business, which sells chips for personal computers, grew 26%. Profitability is moving the right way, too, with the company's adjusted gross margin expanding to 55% from 54% a year earlier. And the growth is speeding up. Management guided for second-quarter revenue of about $11.2 billion, implying roughly 46% year-over-year growth -- up from 38% in Q1.
Broadcom: Faster Growth, Cheaper Stock
Broadcom's fiscal second quarter was arguably even stronger. Revenue climbed 48% year over year to $22.2 billion. The star was AI semiconductor revenue (the custom AI accelerators and networking chips it builds for cloud giants), which soared 143% to $10.8 billion. Adjusted net income came in at $12.1 billion, and free cash flow was $10.3 billion, a staggering 46% of revenue. The outlook is even better. "The momentum continues and in Q3 we expect semiconductor revenue from AI to grow over 200 percent year-over-year to $16.0 billion," said CEO Hock Tan in the company's fiscal second-quarter earnings release. Total revenue guidance calls for about $29.4 billion, up 84% year over year.
The Better Buy Right Now
On growth, Broadcom currently has the edge, with guidance calling for 84% revenue growth this quarter against the roughly 46% AMD's outlook implies. On cash, it isn't close. Broadcom generated about four times AMD's quarterly free cash flow, and it pays a dividend while AMD does not. And on price, Broadcom trades at about half AMD's multiple of expected earnings. Of course, AMD is the purer bet on gaining share in AI accelerators. If the MI450 ramp exceeds forecasts next year, earnings estimates could race higher and make today's multiple look conservative. For investors who want maximum upside to that scenario, AMD is the more explosive stock -- in both directions. But when the faster-growing business is also the cheaper stock and the stronger cash generator, the decision isn't difficult. I'd buy Broadcom over AMD after this sell-off.
Key points
- AMD and Broadcom are two AI chip stocks that have fallen after a brutal week for chip stocks.
- Both companies are executing well, but AMD's price assumes it will continue to gain share in AI chips for years to come.
- Broadcom offers faster growth and a cheaper stock, making it a better buy after the sell-off.
- Broadcom generated about four times AMD's quarterly free cash flow and pays a dividend while AMD does not.
- Broadcom trades at about half AMD's multiple of expected earnings.
If Broadcom's guidance is correct, its AI semiconductor revenue could grow over 200% year-over-year in Q3, reaching $16.0 billion. This would be a significant increase from its current revenue and could lead to higher earnings estimates and a more conservative multiple.
If AMD's MI450 ramp does not exceed forecasts next year, its earnings estimates could be revised lower, making its current multiple look less conservative. Additionally, if Broadcom's AI semiconductor revenue growth slows down, its stock price could be negatively impacted.
