Comparing Semiconductor Stocks: AMD vs. Broadcom

Investing in semiconductor stocks can be a smart choice for many investors. The semiconductor industry showed impressive growth in 2024, with global sales increasing by 19% compared to the previous year. Looking ahead, expectations suggest even more growth in 2025. The World Semiconductor Trade Statistics has projected that the industry will nearly reach $700 billion in 2025, rising from $627 billion in 2024.

This optimism is primarily fueled by the rapid expansion of the artificial intelligence (AI) market, which could sustain growth for years to come. Two major semiconductor stocks that investors might want to consider are Advanced Micro Devices (AMD) and Broadcom (AVGO).

Both companies are benefiting from high demand for their AI-related products. But which one should you invest in? Let’s look at the strengths of AMD and Broadcom to help you make your decision.

AMD's Focus on AI

AMD specializes in semiconductor products that support accelerated computing. This technology uses specialized components to increase the speed of data processing tasks, crucial for AI applications.

As the demand for accelerated computing grows, so does the need for upgrades in today's computer hardware. This trend creates a significant market opportunity for AMD’s products, especially as AI technology continues to rise.

In the latest fiscal third quarter, which ended on September 28, AMD experienced record sales of $6.8 billion, an 18% increase year over year, largely driven by the demand for AI technology.

The company's semiconductor products enhance the performance and efficiency of AI systems in data centers, leading to data center sales reaching a remarkable $3.5 billion, with a staggering 122% growth from the previous year.

To boost its data center business further, AMD is also pursuing strategic acquisitions. One notable upcoming acquisition is ZT Systems, which is expected to close in the first half of 2025. ZT Systems will play a crucial role in helping customers implement AI infrastructure.

Due to the increasing demand for accelerated computing, AMD anticipates that its fourth-quarter revenue will exceed the previous record of $6.8 billion, aiming for $7.5 billion, which reflects a double-digit increase compared to the prior year's revenue of $6.2 billion.

Success Factors for Broadcom

Broadcom's CEO, Hock Tan, described 2024 as a transformative year for the company, driven by two main influences: AI advancements and the acquisition of VMware.

In November 2023, Broadcom finalized its purchase of VMware, a company known for its virtualization software. This software enables businesses to run multiple operating systems on a single server. Broadcom is marketing this capability as a way for companies to create private cloud environments, avoiding reliance on public services from giants like Microsoft.

This strategy has resonated well with customers. Broadcom's infrastructure segment, which includes VMware, saw a revenue increase of 196%, reaching $5.8 billion in the fiscal fourth quarter that ended on November 3.

Regarding AI, Broadcom experienced a 220% growth in AI-related revenue, hitting $12.2 billion in fiscal 2024, a significant rise from $3.8 billion in 2023. This demand for AI significantly contributed to Broadcom's total annual revenue of $51.6 billion, marking a 44% increase over fiscal 2023.

Broadcom’s sales surge also led to a robust free cash flow of $5.5 billion in the fourth quarter, up from $4.7 billion a year earlier. Consequently, the company raised its dividend by 11%, adjusting it to $0.59 per share.

Choosing Between AMD and Broadcom Stocks

Both AMD and Broadcom are outstanding semiconductor companies with impressive sales growth. Choosing between the two can be a challenge, especially since owning shares of both would be ideal. One consideration is the valuation, often evaluated through the price-to-earnings (P/E) ratio.

The P/E ratio indicates how much investors are willing to pay for each dollar of earnings. As 2024 comes to an end, AMD and Broadcom's P/E ratios are showing differing trends.

After Broadcom reported its solid fiscal fourth-quarter results, its share price soared, reaching a 52-week high of $251.88 on December 16. This strong performance pushed up its P/E ratio, suggesting that AMD shares might present a better value at this moment.

Additionally, AMD has a strategic advantage with lower exposure to potential risks from U.S. government tariffs and export restrictions on semiconductor products to China. Approximately one-third of Broadcom’s sales are linked to Chinese customers, while AMD's exposure is considerably less, accounting for just 15% of its sales.

While both companies boast thriving AI segments, AMD's appealing valuation and reduced risk exposure make it a more attractive semiconductor stock choice at this time. However, investors should keep an eye on Broadcom and consider purchasing shares during price dips.

semiconductor, investment, AI, stocks, growth