ASML Holding vs. Broadcom: Which Semiconductor Stock is a Better Buy?

ASML Holding N.V. (ASML) in Veldhoven, the Netherlands, and San Jose, Calif.-based Broadcom Inc. (AVGO) are two prominent players in the semiconductor industry.  ASML develops, sells, and services advanced semiconductor equipment systems, focusing on lithography-related systems worldwide. It caters mainly to the makers of memory chips and logic chips. In comparison, AVGO designs and supplies a range of analog and digital semiconductor connectivity solutions used in data center networking, home connectivity, broadband access, telecommunications equipment, smartphones, and base stations.

The heightened demand for semiconductor chips from various industries, mainly automotive and consumer electronics, amid a global chip supply crunch has driven prices higher. However, the industry recorded 29% year-over-year sales growth in July 2021.  And because rising government and corporate investments in the semiconductor industry should gradually address the supply crunch, the industry should witness solid growth. The global semiconductor market is expected to grow at 7.7% CAGR to $778 billion by 2026. So, both ASML and AVGO should benefit.

While AVGO’s shares have gained 12.9% in price year-to-date, ASML has surged 75.9%. ASML is a clear winner with 9.5% price gains versus AVGO’s 1.8% returns in terms of their past month’s performance. But which of these stocks is a better pick now? Let’s find out.

Click here to checkout our Semiconductor Industry Report for 2021

Latest Developments

In an announcement dated June 4, 2021, ASML and Jheronimus Academy of Data Science (JADS) collaborated in the field of data science. ASML will focus on the thesis assignments from JADS students at ASML and a case study within JADS’ Data Entrepreneurship in Action (DEIA) program. Because  the importance of data science is growing in the semiconductor industry, and for ASML technology in particular, this collaboration is likely to benefit ASML substantially.

On June 15, 2021, AVGO announced industry-first capabilities for Value Stream Management (VSM) in its ValueOps software portfolio that seamlessly combines business and investment-oriented product management. Integration of AVGO’s Clarity and Rally software products enables enterprises to manage, track and analyze unified value streams with a consistent value orientation and methodology. As a recipient of the Leader award in the 2021 Enterprise Agile Planning Tools, AVGO hopes the recognition helps ValueOps gain expanded market reach in the coming months.

Recently the Reitmeister Total Return Portfolio (RTR) closed a winning trade in AVGO for a 25% gain. Learn more about the RTR service here.

Recent Financial Results

For its fiscal second quarter, ended July 4, 2021, ASML’s total net sales increased 99.3% year-over-year to €4.02 billion ($4.75 billion). The company’s gross profit came in at €2.04 billion ($2.42 billion), representing a 27.5% year-over-year improvement. Its income from operations were  €1.24 billion ($1.47 million) for the quarter, up 36.9% from the prior-year period. While its net income increased 38.2% year-over-year to €1.04 billion ($1.23 billion), its EPS increased 40.8% to €2.52 ($2.98). As of July 4, 2021, the company had €5.19 billion ($6.13 billion) in cash and cash equivalents.

For its fiscal third quarter, ended August 1, 2021, AVGO’s net revenue increased 16.4% year-over-year to $6.78 billion. The company’s non-GAAP gross profit came in at $5.09 billion, up 17.8% from the prior-year period. Its non-GAAP operating income was $3.95 billion, representing a 24% rise from the prior-year period. AVGO’s non-GAAP net income came in at $3.12 billion, up 28.3% from the year-ago period. Its non-GAAP EPS increased 28.9% year-over-year to $6.96. The company had $11.11 billion in cash and cash equivalents as of August 1, 2021.

Past and Expected Financial Performance

ASML’s revenue and EBITDA grew at CAGRs of 18.6% and 25.3%, respectively, over the past three years. The company’s total assets have grown at a 10.8% CAGR over the past three years.

Analysts expect ASML’s EPS to increase 58.2% year-over-year in the current quarter, ending September 30, 2021, 54.4% in the current year, and 20.8% next year. Its revenue is expected to grow 34.7% year-over-year in the current quarter, 31.5% in the current year, and 14.9% next year. The stock’s EPS is expected to grow at a 29.8% rate over the next five years.

In comparison, over the past three years, AVGO’s revenue and EBITDA have grown at CAGRs of 9.4% and 14.6%, respectively. The company’s total assets have grown at a 14.6% CAGR over the past three years.

AVGO’s EPS is expected to grow 22.2% year-over-year in the current quarter, ending September 30, 2021, 26.3% in the current year, and 10.6% next year. Its revenue is expected to grow 13.7% year-over-year in the current quarter, 14.7% in the current year, and 7.1% next year. Analysts expect the stock’s EPS to increase at a 14.7% CAGR over the next five years.

Profitability

AVGO’s trailing-12-month revenue is almost 1.3 times what ASML generates. AVGO is also more profitable with a 73.6% gross profit margin versus ASML’s 51.2%.

Also, AVGO’s  51.3% and 44.1% respective EBITDA and levered free cash flow margins compare favorably with ASML’s 35.6% and 29%.

Valuation

In terms of non-GAAP forward P/E, ASML is currently trading at 54.13x, which is  206.3% higher than AVGO’s 17.67x.

In terms of non-GAAP forward PEG, ASML’s 2.06x is 64.8% higher than AVGO’s 1.25x.

POWR Ratings

While ASML has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, AVGO has an overall A grade, equating to Strong Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.

Both stocks have B grades for Quality, which is consistent with their higher-than-industry profitability ratios. AVGO has a 51.3% trailing-12-month EBITDA margin, which is 249% higher than the 14.7% industry average. ASML has a 35.6% EBITDA margin, which is  142.1% higher than the 14.7% industry average.

ASML has been graded an A for Momentum, in sync with its impressive price gains over the past year. The stock has gained 70.9% in price over the past six months. However, AVGO has a B grade for Momentum, reflecting its relatively lower price gains over the past year. AVGO has returned 17.4% over the past six months.

Of the 99 stocks in the A-rated Semiconductor & Wireless Chip industry, ASML is ranked #47, while AVGO is ranked #2.

Beyond what we’ve stated above, our POWR Ratings system has also rated ASML and AVGO for Value, Stability, Sentiment, and Growth. Get all ASML ratings here. Also, click here to see the additional POWR Ratings for AVGO.

The Winner

The sustained demand for semiconductor chips amid the current digitalization of almost all industries, and policy support to address the chip shortage, brightens the industry’s prospects. Both AVGO and ASML are well-positioned to capitalize on the industry tailwinds. However, higher profitability and lower valuation we think make AVGO a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry.

Click here to checkout our Semiconductor Industry Report for 2021

ASML shares were trading at $853.50 per share on Thursday afternoon, down $4.49 (-0.52%). Year-to-date, ASML has gained 75.43%, versus a 20.89% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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