The past year has seen an explosion in demand for the components needed to build the hardware foundation for artificial intelligence (AI) systems. This has led to significant sales increases for semiconductor chip makers like Broadcom (NASDAQ: AVGO) and Qualcomm (NASDAQ: QCOM).
As a result, Broadcom stock is up 114% over the past 12 months, while Qualcomm stock is up 55%. Both companies have the potential for years of further revenue growth as the technology sector moves into the AI era and traditional computing paradigms are restructured.
But between these two tech heavyweights, which is the better choice to invest in the burgeoning AI market? Broadcom and Qualcomm both have attractive strengths to answer this is not an easy question.
Broadcom’s AI success
Broadcom boasts a wide range of semiconductor and software solutions for IT infrastructure, including cloud computing and cybersecurity. The company’s products are used in many industries, from data centers to mobile devices to automotive.
These markets now require semiconductor components for AI that deliver high performance with low energy consumption. Broadcom’s products meet this challenge, which is why network product sales rose 43% year-over-year in the fiscal third quarter ended August 4. Network sales accounted for 55% of the semiconductor segment’s $7.3 billion in sales in the third quarter. .
AI-related solutions are expected to account for $12 billion of Broadcom’s projected $51.5 billion in revenue for its 2024 fiscal year, which ends Nov. 3. Additionally, the company expects strong sales driven by AI demand to continue through fiscal 2025.
Broadcom executives believe the increased use of AI could lead to major upgrades to IT infrastructure across the industry. The growing sophistication of AI systems will require better technology, such as larger data storage and faster, more resilient computer networks.
Such a transformation could lead to a period of sustained growth for semiconductor providers such as Broadcom. To meet the needs of enterprises in this new era of AI, Broadcom acquired software company VMware last November.
Executives expect VMware’s software to help companies run AI systems in the cloud. And with the addition of VMware, Broadcom’s revenue increased significantly. Third-quarter sales reached $13.1 billion, an increase of 47% compared to sales of $8.9 billion in the same period last year.
For Qualcomm
Qualcomm is a leading provider of semiconductor components for smartphones and other mobile devices. But the company’s long-term strategy, in the words of CEO Cristiano Amon, is to “transform from a telecommunications company to a leading intelligent computing company.” Intelligent computing refers to AI.
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We are rapidly moving toward realizing that vision. In October, Qualcomm will unveil the Snapdragon 8 mobile platform boasting new AI capabilities. Management sees AI capabilities becoming more prevalent in smartphones, which could boost the mobile phone giant’s sales for years.
Qualcomm is also expanding beyond the mobile market, providing products for driver assistance and autonomous driving systems in the automotive sector and integrated circuits for the Internet of Things industry.
Perhaps these expansion aspirations will help justify widespread reports that Qualcomm is considering an acquisition by Intel, the chipmaker that creates the semiconductor giant. However, the decision to invest in Qualcomm should not be made in hopes of acquiring Intel, as this deal may not materialize, especially considering the regulatory hurdles that must be overcome.
The most important thing right now is Qualcomm’s current performance, and it’s doing well. Sales for the company’s fiscal third quarter, which ended June 23, were $9.4 billion, an 11% increase from the same period last year, continuing the upward trend.
QCOM Revenue (TTM) Chart
Management expects this trend to continue in the fiscal fourth quarter, with sales expected to be at least $9.5 billion, a double-digit increase from $8.6 billion in the year-ago period.
Which to choose between Broadcom and Qualcomm?
As companies in the IT industry upgrade their technology to support the processing power demands of increasingly complex AI systems, owning shares of both Broadcom and Qualcomm is a smart bet.
Broadcom’s comprehensive suite of hardware and software products makes it an attractive long-term investment. The same is true for Qualcomm, given the pervasive role that mobile devices play in society.
But between the two semiconductor giants, there are several factors that make Qualcomm stock the better investment choice right now. One is the difference in stock valuation using the price-to-earnings ratio (P/E), which compares the stock price to net income. This helps investors assess the relative value of stocks by seeing how much they are willing to pay for each dollar of earnings.
QCOM PER ratio chart
Based on Broadcom’s higher P/E compared to Qualcomm, the latter looks like a much better value at the moment. Additionally, Qualcomm closed Monday’s trading at around $170, while the median price target among Wall Street analysts covering the stock was $212.50. Compare that to Wall Street’s median price target for Broadcom, which is $195. Broadcom’s closing price on Monday was $172.50. This suggests that Qualcomm stock has more upside potential than Broadcom stock.
Additionally, companies have a solid track record of increasing dividends, but Qualcomm’s 2% dividend yield is higher than Broadcom’s 1.2%. Considering these factors, Qualcomm outperforms Broadcom as a better AI chipmaker to invest in right now.
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Roberto Izquierdo has a position at Inter. The Motley Fool has a position in and recommends Qualcomm. The Motley Fool recommends Broadcom and Intel and recommends the following options: November 2024 $24 short calls on Intel. The Motley Fool has a disclosure policy.
AI Chipmaker Stocks Improve: Broadcom vs. Qualcomm was originally published by The Motley Fool