Forget Intel: Buy This Great Semiconductor Stock Instead

Clever (Internal 1.11%) was once considered a pioneer of the semiconductor market. It was the world’s largest maker of x86 CPUs for computers and servers, and produced the world’s smallest, densest, and most powerful chips.

But over the past 10 years, Intel’s stock has fallen 37% compared to the benchmark index. PHLX Semiconductor Industry index up 243%. Intel has fallen behind most of its competitors in the industry as it struggles with chip shortages, delays and inconsistent strategies under three different CEOs. Lost mobile CPU market, left behind Taiwan Semiconductor Manufacturing in a “process race” to produce denser, more advanced chips and capture large portions of the desktop and laptop CPU markets Advanced Micro Devices.

Intel is reportedly considering it now harsh measures — a possible spin-off of the foundry unit, the sale of its programmable chip division Altera, or even final sale the whole company QualcommIt might be tempting to buy Intel as a contrarian move before those plans are fully realized, but its stock still isn’t particularly cheap, trading at 21 times forward earnings. It also suspended its dividend last month.

Rather than buying Intel in the hope of a long-term transformation, I would argue that it is wiser to invest in a better-run semiconductor company with a brighter future. This is one of the better plays Extended communication (AVGO 1.10%)Increasing by approximately 500% in the last five years.

Why Broadcom impressed the bulls

In 2016, Singapore-based chipmaker Avago Technologies acquired the original Broadcom. The combined company sells a wide range of chips for the mobile device, data center, networking, wireless, storage and industrial markets.

The “new” Broadcom expanded into the infrastructure software market by buying CA Technologies in 2018, Symantec’s enterprise security unit in 2019 and cloud software giant VMware last November. It also relocated its business to the U.S. in 2018 so that future acquisitions would face less regulatory scrutiny.

Broadcom’s mix of organic growth and aggressive acquisitions has impressed bulls. From fiscal 2018 to fiscal 2023 (which ended last October), its revenue, adjusted earnings per share (EPS) increased at a 15% compound annual rate. In comparison, Intel’s revenue and adjusted EPS rejected With annual compound interest rates of 5% and 26% from 2018 to 2023, respectively.

Why is Broadcom a superior chipmaker?

Unlike Intel, which manufactures most of its chips in its own foundries, Broadcom is a “fabless” chipmaker that outsources production to third-party foundries such as TSMC. It also mostly sells cheaper chips that are easier to research, develop, and manufacture than Intel’s more powerful CPUs.

Rapid growth in the last two years Artificial intelligence market has led many data center operators to upgrade their servers. This trend has boosted sales of Broadcom’s AI-focused networking, optical, and specialized accelerator chips. In fiscal 2024, it expects sales of AI chips to nearly triple, and it predicts they will account for nearly a quarter of its revenue.

Intel is also trying to capitalize on the AI ​​boom with new “AI CPUs” that can natively handle more AI tasks without an accelerator chip. However, it produces these chips with much lower gross margins than its non-AI CPUs. Broadcom, which increased its adjusted gross margin by 110 basis points year-over-year to 75.8% in the first half of fiscal 2024, is not sacrificing its margins as it ships more AI chips.

Finally, Broadcom’s expansion of its infrastructure software business reduces its dependence on its largest chip customer. AppleIt also reduces its cyclical exposure, accounting for a fifth of its total revenue before the VMware acquisition semiconductor marketBroadcom generated 42% of its revenue from its infrastructure software business in the latest quarter, up 22% from a year ago, with the rest coming from its semiconductor business. It expects its software unit to grow to about half of its top line, and that expansion would make it much more diversified than Intel.

Broadcom still has a bright future

Analysts expect revenue and adjusted EPS to rise 44% and 14%, respectively, in fiscal 2024 as Broadcom integrates VMware. They expect revenue and adjusted EPS to rise 17% and 28%, respectively, in fiscal 2025 as it exits the acquisition. Its stock still looks reasonably valued at 28 times forward earnings and pays a reasonable forward yield of 1.2%.

Intel’s outlook is much more complicated. Analysts expect its revenue and adjusted EPS to fall 4% and 74%, respectively, in 2024 as the company desperately tries to find a path to transformation. For 2025, they expect its adjusted EPS to more than quadruple while its revenue grows 8% — but its recent moves strongly suggest it won’t meet those expectations.

So for now, it makes more sense to stick with Broadcom’s balanced, broadly diversified, and growing business rather than wait for Intel to bounce back at the 11th hour. Intel’s business could potentially be saved by an acquisition, but any takeover attempt would likely face close scrutiny from antitrust regulators around the world.

Leo Sun The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel, and recommends the following options: Short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.