Better Stock AI Chipmaker: Broadcom vs. Qualcomm

Over the past year, there has been explosive demand for the components needed to build the hardware foundations for artificial intelligence (AI) systems. This has resulted in huge sales for semiconductor chip makers such as Broadcom (AVGO 1.91%) and Qualcomm (QCOM 1.53%).

As a result, Broadcom shares are up 114% over the past 12 months, while Qualcomm shares have gained 55%. Both companies could see years of revenue growth as the tech sector moves into the age of AI, which is reshaping the traditional computing paradigm.

But between this pair of tech heavyweights, is one a better choice to invest in the burgeoning AI market? It’s not an easy question to answer, as both Broadcom and Qualcomm have compelling strengths.

Broadcom’s AI success

Broadcom boasts a wide range of software and semiconductor solutions for IT infrastructure, including cloud computing and cybersecurity. Its products are used in many industries, from data centers to mobile devices and automobiles.

These markets now need semiconductor components for AI that offer high performance with low power consumption. Broadcom’s offerings are up to the challenge, which is why sales of its networking products rose 43% year-over-year in its fiscal third quarter, which ended Aug. 4. .

AI-related solutions are expected to contribute $12 billion of Broadcom’s estimated $51.5 billion in sales for fiscal 2024, which ends Nov. 3.

Broadcom management believes that the growing use of AI could lead to a massive industry-wide IT infrastructure upgrade. The expanding sophistication of AI systems requires ever-better technology, including larger data storage and faster, more resilient computer networks.

Such a transformation could lead to a period of sustained growth for semiconductor suppliers like Broadcom. To help it meet business needs in this new era of artificial intelligence, Broadcom acquired software company VMware last November.

Management anticipates that VMware software will help companies run AI systems in the cloud. And the addition of VMware significantly boosted Broadcom’s top line. In Q3, its revenue reached $13.1 billion, a 47% increase from sales of $8.9 billion in the year-ago period.

The case for Qualcomm

Qualcomm is a leading supplier of semiconductor components for smartphones and other mobile devices. However, its long-term strategy is, in the words of CEO Cristiano Amon, a “transformation from a communications company to a leading intelligent computing company.” By intelligent computing, he means AI.

They are moving quickly to fulfill that vision. In October, Qualcomm will unveil its Snapdragon 8 mobile platform, which has new AI capabilities. Management sees AI features becoming ubiquitous on smartphones, and that could boost the phone titan’s sales for years.

Qualcomm is also working to expand beyond the mobile phone market, offering products for driver assistance and autonomous driving systems for the automotive sector and integrated circuits for the Internet of Things industry.

Perhaps those desires to expand help justify reports circulating that Qualcomm is considering a bid for the chipmaker. Intelwhich would create a semiconductor colossus. However, that deal may not happen, especially given the regulatory hurdles it would have to overcome, so no one should make an investment decision in Qualcomm based on anticipation of an acquisition Intel.

What matters most now is Qualcomm’s current performance, and it’s doing well. In the company’s fiscal third quarter, which ended June 23, revenue rose 11% year-over-year to $9.4 billion, continuing the trend of revenue growth.

Data by YCharts.

Management expects that trend to continue in the fiscal fourth quarter, forecasting sales of at least $9.5 billion, a double-digit percentage increase from $8.6 billion in the year-ago period.

Choosing between Broadcom and Qualcomm

With IT industry players upgrading their technology to support the processing power demands of increasingly complex AI systems, owning shares in both Broadcom and Qualcomm would be a smart bet.

Broadcom’s comprehensive suite of hardware and software products makes it an attractive long-term investment. The same can be said for Qualcomm, given the ubiquitous role mobile devices play in society.

But between these two semiconductor giants, right now, several factors make Qualcomm stock the best investment choice. One is the difference in their stock valuations using the price-to-earnings (P/E) ratio, which compares stock price to net income. This helps assess the relative value of a stock by seeing how much investors are willing to pay for each dollar of earnings.

Data by YCharts.

Based on Broadcom’s high P/E ratio compared to Qualcomm, the latter looks like a much better value right now. Moreover, while Qualcomm ended Monday trading at around $170, among Wall Street analysts who cover the stock, the median stock price target was $212.50. Compare that to the median Wall Street stock price target of $195 for Broadcom, which closed Monday at $172.50. This suggests a belief that Qualcomm stock has more upside than Broadcom.

Additionally, while the companies have strong records of growing dividend payouts, Qualcomm’s dividend yield of 2% is higher than Broadcom’s 1.2%. Given these factors, Qualcomm edges out Broadcom as the best AI chipmaker to invest in right now.