Which semiconductor stock is better?

In this piece, we evaluated two semiconductor stocks: Intel (INTC) and Broadcom (AVGO). A closer look suggests a bearish view for Intel and a neutral view for Broadcom.

While both companies are involved in the semiconductor business, Intel focuses more on data centers, Internet of Things, PCs and platform products. Broadcom, on the other hand, is known for its artificial intelligence chips, although it also makes chips for enterprise, cloud, and data center uses. Additionally, Broadcom is a fabless company, meaning it doesn’t make its own chips, while Intel makes its own semiconductors.

In terms of share price, Intel shares are down 62% year-to-date, dragging its trailing 12-month return into the red at 50%. Meanwhile, Broadcom shares are up 34% year to date and up 75% over the past year.

With such a dramatic difference in share price performance, the wide gap between their valuations is no surprise. We compare their price-to-earnings (P/E) ratios to gauge their valuations against each other and their industry.

For comparison, the semiconductor industry trades at a P/E of 51.3x, versus a three-year average of 36.7x.

Intel

At a P/E of 85.65x, Intel trades at a sizeable premium to its industry, despite the chipmaker’s mounting woes. While the forward P/E of 53.8x is much more encouraging, there are too many question marks at this point to tell how accurate it might be. Thus, a bearish view seems appropriate for Intel stock right now.

For example, the chip maker is looking to sell part of its business as part of its massive restructuring efforts. Intel CEO Pat Gelsinger told Yahoo! Financially, according to the company’s earnings, it is “Intel’s biggest restructuring … since the memory microprocessor decision four decades ago.”

As part of that strategy, Gelsinger is said to be considering an initial public offering of Altera, Intel’s chip-making division, along with the potential sale of its foundry business.

In addition, Intel wants to offload at least part of its stake in Mobileye ( MBLY ). In addition, Qualcomm ( QCOM ) may be interested in acquiring Intel’s design divisions, particularly its client computer design operations.

In addition, Intel’s potential fire sale puts at risk the $19.5 billion in grants and loans it was supposed to receive from the U.S. Chips and Science Act. The funds were intended to support Intel’s domestic chip production, but its recent cutbacks cast doubt on whether it will secure the money.

Ultimately, Intel will need time to streamline its operations, and by the end of the process, Intel may look quite different than it does today. As a result, investors may want to steer clear of this stock, at least until there is some light at the end of the tunnel.

The story continues

What is the price target for INTC stock?

Intel has a consensus rating of Hold based on one Buy rating, 26 Holds, six Sells and one Buy rating assigned in the past three months. At $26.09, the average price target on Intel shares implies a potential upside of 37.46%.

See more INTC analyst ratings

Broadcom

At a P/E of 122.6x, Broadcom certainly isn’t cheap, though its forward P/E of 23.8x suggests analysts expect its earnings to explode. However, investors may have missed the latest buy-the-dip opportunity at this point, suggesting a neutral view may be appropriate in the short term.

Examining Broadcom’s latest quarterly results reveals that the company disappointed investors as the results fell short of expectations. The company’s outlook also dipped as it projected revenue of $14 billion for the current quarter, slightly below sales of $14.1 billion.

After the earnings report, Broadcom shares fell 10%, creating a buying opportunity for investors. However, the selloff didn’t last long as the stock quickly started to rise again. As of mid-morning Tuesday alone, the stock is already up 3%.

Essentially, Broadcom stock is once again rated for perfection, which suggests it could be another disappointment with its next earnings report. As a result, investors who watch and wait patiently should be able to pick up some Broadcom stock at a discount with any other sign of temporary weakness in the company or its stock.

What is the price target for AVGO stock?

Broadcom has a Strong Buy consensus rating based on 23 buy ratings, three holds and zero sells assigned in the past three months. At $198.66, Broadcom’s average price target implies a potential upside of 34.04%.

See more AVGO analyst ratings

Conclusion: Bearish on Intel, neutral on Broadcom

Theses for Intel and Broadcom couldn’t be further. While Broadcom earns a neutral rating, investors shouldn’t lose money by picking up the stock even at its current price, especially given its low forward price — as long as they buy and hold for the long haul.

Instead, Intel’s future seems too uncertain. I might become more constructive on the stock if the company starts to create shareholder value through spin-offs, sales and spin-offs. However, the elimination of the dividend suggests that it may be some time before we see any value creation.

Disclosure