Broadcom Inc. (AVGO) in San Jose, Calif., designs, develops and supplies various semiconductor devices focusing on complex digital and mixed-signal complementary metal oxide semiconductor-based devices and analog III-V-based products worldwide. In comparison, Analog Devices, Inc. (ADI) in Wilmington, Mass., designs, manufactures, tests, and markets integrated circuits (ICs), software, and subsystems that leverage analog, mixed-signal, and digital signal processing technologies.
The semiconductor chip industry has faced severe supply chain issues since the COVID-19 pandemic. In the face of overwhelming demand, lingering logistical disruptions continue to hinder optimal chip production rates. However, given the gradual resumption of economic activities and supportive federal policies like the CHIPS Act, productivity is expected to improve in the coming quarters. Qualcomm Inc.’s (QCOM) CEO Cristiano Amon said, “We still have more demand than supply, but we’re starting to see in the second half of 2022 a more balanced equation. I think as we enter 2023, we’re going to get out of the crisis.”
Furthermore, investors’ interest in the semiconductor chip industry is evident in the VanEck Vectors Semiconductor ETF’s (SMH) 4.8% returns over the past month. In addition, according to Allied Market Research, the global AI chip market is projected to expand at a 45.4% CAGR from 2018 - 2025. So, both AVGO and ADI should benefit in the near term. AVGO stock has gained 23.6% in price over the past year, while ADI has gained marginally. However, AVGO has retreated marginally over the past month, versus ADI’s 6.9% gains.
Note that AVGO is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.
Which stock is a better buy now? Let’s find out.
Latest Developments
On May 26, 2022, AVGO announced its agreement to acquire all the outstanding shares of the leading innovator in enterprise software, VMware, Inc. (VMW). The deal aims to help the companies reach out to a more extensive consumer base and add better value for their shareholders.
On May 18, 2022, Vincent Roche, ADI’s CEO and Chair said, “Market leadership in numerous secular mega trends such as automation, electrification, and advanced connectivity is a testament to the depth and breadth of our performance leading analog, mixed-signal, and power portfolio. Our solutions enable the intelligent edge, accelerating digitalization across industries.”
Furthermore, ADI’s Wireless Battery Management System was certified to the highest standard of automotive cybersecurity engineering and management on March 31, 2022, marking a milestone achievement for the company.
Recent Financial Results
AVGO’s non-GAAP net revenue increased 22.6% year-over-year to $8.10 billion for its fiscal second quarter, ended May 1, 2022. Its non-GAAP net income came in at $4 billion, up 34.2% year-over-year, while its non-GAAP EPS came in at $9.07, up 37% year-over-year. Also, its adjusted EBITDA was $5.11 billion, up 29.1% year-over-year.
ADI’s revenue has increased 78.9% year-over-year to $2.97 billion for the second quarter, ended April 30, 2022. Its adjusted operating income was $1.50 billion, up 115.4% year-over-year, while its adjusted EPS came in at $2.40, up 55.8% year-over-year.
Past and Expected Financial Performance
AVGO’s revenue and EPS have grown at CAGRs of 11.2% and 39%, respectively, over the past three years. Analysts expect AVGO’s revenue to increase 19.8% in the current year and 6% in the next year. The company’s EPS is expected to grow 37.1% in the current quarter, 31.9% in the current year, and 9.2% next year. And its EPS is expected to grow at 14.7% per annum over the next five years.
In comparison, ADI’s revenue has grown a 16.6% CAGR over the past three years. However, its EPS has declined at a 5.8% CAGR over the past three years. Analysts expect the company’s revenue to increase 61.6% in the current year and 5.9% in the next year. The company’s EPS is expected to grow 41.3% in the current quarter, 43.7% in the current year, and 8.4% next year. Furthermore, ADI’s EPS is expected to grow at 18.7% per annum over the next five years.
Profitability
AVGO is more profitable, with a gross profit margin of 74.90%, compared to ADI’s 61.11%. And AVGO’s 29.76% net income margin is higher than ADI’s 16.84%. Also, AVGO’s EBIT margin and EBITDA margin of 37.59% and 56.12%, respectively, compare with ADI’s 25.11% and 43.78%, respectively. Furthermore, AVGO’s 11.29% ROTC compares with ADI’s 5.04%.
Thus, AVGO is more profitable here.
Valuation
In terms of forward EV/Sales, AVGO is currently trading at 8.11x, which is higher than ADI’s 7.66x. However, AVGO’s 12.93x forward EV/EBITDA is 6% lower than ADI’s 13.75x.
POWR Ratings
AVGO has an overall A rating, which equates to Strong Buy in our proprietary POWR Ratings system. In comparison, ADI has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
AVGO has an A grade for Quality, which is consistent with its higher-than-industry profitability ratios. AVGO’s 38.43% trailing-12-month ROCE is 383.3% higher than the 7.95% industry average. In comparison, ADI has a Quality grade of C, which is consistent with its 6.67% ROCE, which is 16.2% lower than the industry average.
Both AVGO and ADI have C grades for Stability, in sync with their betas of 1.05 and 1.07, respectively.
Among the 95 stocks in the Semiconductor & Wireless Chip industry, AVGO is ranked #7, while ADI is ranked #59.
Beyond what we have stated above, we have also rated both the stocks for Growth, Value, Momentum, and Sentiment. Click here to view AVGO ratings. Get all ADI ratings here.
Click here to checkout our Semiconductor Industry Report for 2022
The Winner
Supportive federal policies and overwhelming demand should bode well for AVGO and ADI. However, we think AVGO’s higher profitability makes it a better buy here.
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 top-rated stocks in the Semiconductor & Wireless Chip industry here.
AVGO shares were trading at $565.29 per share on Wednesday afternoon, down $7.70 (-1.34%). Year-to-date, AVGO has declined -14.47%, versus a -13.12% rise in the benchmark S&P 500 index during the same period.
About the Author: Riddhima Chakraborty
Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.
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