Superior AI-Focused Stock Comparison: Broadcom versus AMD
This is an opportune time to invest in the rapidly expanding artificial intelligence (AI) sector. The industry is predicted to surpass $184 billion this year, with projections indicating a significant rise to over $826 billion by 2030.
Two notable AI tech stocks to consider are Broadcom (AVGO, -3.98%) and Advanced Micro Devices (AMD, -2.39%). Their strong sales growth can be attributed to the AI industry's expansion, with customers gravitating towards their offerings.
However, it's worth pondering: is one stock a superior long-term AI investment than the other? To help you make an informed decision, let's scrutinize Broadcom and AMD.
Broadcom's AI-focused acquisitions
Broadcom is riding the AI wave, as its sales surged 47% year-over-year to $13.1 billion during its fiscal third quarter, ending August 4. Although this increase is noteworthy, 43% of this growth was courtesy of its acquisition of VMware in November 2021.
VMware's renowned virtualization software empowers IT organizations to run multiple operating systems on a single server. Yet, its private AI technology serves as a strategic factor behind Broadcom's acquisition. This technology safeguards a company's data from unauthorized AI system access, a key factor due to the data-intensive nature of AI.
Broadcom's private AI offerings rely on VMware Cloud Foundation (VCF) platform, which accounted for over 80% of VMware products booked in the third quarter. This highlights robust customer demand for VCF and its capacity to establish a private AI solution for businesses.
Besides AI-related sales from semiconductor products, Broadcom's semiconductor solutions division contributed $7.3 billion of its $13.1 billion in third-quarter revenue, marking a 5% year-over-year increase.
AMD's AI-focused strategy
AMD's strategy to capture AI market share is centered on accelerated computing. It processes data-intensive work separately from other computer tasks, facilitating the efficient operation of complex software applications like AI.
AMD's dedication to accelerated computing lies at the heart of its success in the AI era. Companies like Meta Platforms, Facebook's parent organization, are rapidly adopting its products. For instance, Meta acquired 1.5 million units of AMD's EPYC computer processor for its cloud computing servers, accommodating AI systems.
AMD's third-quarter sales growth, ending September 28, reached 18% year-over-year, amounting to $6.8 billion. The company anticipates a further 22% year-over-year sales increase in the fourth quarter, surpassing $7.5 billion.
This sales momentum has positively impacted AMD's financials. Its third-quarter gross margin soared to 50%, up from 47% last year. This boosted its net income to $771 million, representing a 158% increase compared to the prior year. This in turn lifted its daluted earnings per share (EPS) to $0.47, marking a 161% year-over-year increase.
The choice between Broadcom and AMD stocks
Both Broadcom and AMD possess compelling AI strategies that can capitalize on the growing AI market in the long term. Pick one of these AI stocks is not an easy task, so which one wins out?
A distinctive feature of Broadcom is its dividend offerings, while AMD does not. Broadcom's forward dividend yield stands at a strong 1.3% at present.
However, excessive debt could compromise the dividend's security. In its fiscal third quarter, Broadcom had an outstanding $70 billion in debt, resulting in $1 billion in interest payments, contributing to its net loss in the quarter.
Conversely, AMD's debt at the end of its fiscal third quarter was manageable at $1.7 billion. Despite this, its Q3 cash and equivalents were $3.9 billion, leaving it with effective net debt of zero.
Another factor to consider is the price-to-earnings ratio (P/E ratio) for each company. This metric serves as a means to assess the relative value of a stock based on investors' willingness to pay per dollar of earnings.
At present, AMD's P/E multiple is lower than Broadcom's, indicating that AMD shares are now the more attractive investment. Given these factors, alongside AMD's success in accelerated computing, it's plausible that AMD is the better AI stock to invest in the secular trend of artificial intelligence.
Given the rapid growth of the AI sector and the potential for significant profit, it's essential to consider investing in companies that are well-positioned to capitalize on this trend. Broadcom's acquisitions, such as VMware, and its focus on private AI technology have contributed to its impressive sales growth. On the other hand, AMD's strategy of accelerated computing, which facilitates the efficient operation of AI applications, has attracted major companies like Meta Platforms.
In terms of financial considerations, AMD currently has a lower price-to-earnings ratio (P/E ratio) compared to Broadcom, making it a potentially more attractive investment at this time. Additionally, AMD's managing of its debt and strong financial performance during the third quarter suggest a solid financial foundation for future growth. These factors, combined with AMD's success in accelerated computing, lend credence to the idea that AMD may be the better AI stock to invest in, given the secular trend towards artificial intelligence.
