In this piece, I evaluated two semiconductor stocks, Broadcom Inc. (AVGO) and KLA Corporation (KLAC), to determine which has better return potential. Based on a fundamental comparison of these stocks, I find AVGO a better pick for the reasons explained throughout this article.
The CHIPS and Science Act, signed into law by President Biden last year, earmarks $52.70 billion to support various aspects of American semiconductor research, development, manufacturing, and workforce training.
One year into its implementation, the act has fostered workforce development, and initiated funding for semiconductor manufacturing projects, with the potential to enhance the industry's global competitiveness.
Furthermore, the semiconductor industry is essential for advancing technologies like AI, machine learning, and IoT. Its growth is further propelled by the global spread of digital technologies and the surging use of consumer electronics.
As per Mordor Intelligence, the global Semiconductor industry is expected to reach $1.09 trillion by 2028, expanding at a CAGR of 10.9%.
AVGO is a clear winner in terms of price performance as the stock has returned 103% over the past year, compared to KLAC’s 71.8% gain. Moreover, AVGO has surged 56.4% year-to-date, higher than KLAC’s 28% return.
Here are the reasons I think AVGO could perform better in the near term:
Latest Developments
On October 2, 2023, AVGO announced the introduction of its state-of-the-art 5nm 200G/lane optical PAM-4 DSP PHY, bearing the name Sian™ BCM85822, at ECOC 2023. This groundbreaking advancement offers 200G/lane serial optical interfaces, effectively facilitating the cost-efficient production of 800G and 1.6T pluggable modules.
This development addresses the surging demand for increased bandwidth and reduced power consumption in hyperscale data centers.
Moreover, on September 26, AVGO's subsidiary, Symantec, unveiled an exciting collaboration with Google Cloud, focused on integrating generative AI (gen AI) into the Symantec Security platform. The primary goal of this partnership is to bridge the cybersecurity skills gap by enhancing the accessibility and user-friendliness of security tools, particularly for less experienced personnel.
In contrast, on September 5, KLAC announced its BOD had authorized the company to repurchase up to $2 billion of the company's common stock. This is in addition to the existing share repurchase authorization, which had approximately $1.60 billion remaining as of August 31, 2023.
Recent Financial Results
In the fiscal third quarter ended July 30, 2023, AVGO’s net revenue increased 4.9% year-over-year to $8.88 billion. Its adjusted EBITDA rose 7.9% from the year-ago quarter to $5.80 billion.
In addition, the company’s non-GAAP net income and non-GAAP EPS improved 8.4% and 8.3% from the prior-year quarter to $4.60 billion and $10.54, respectively.
On the other hand, during the fourth quarter ended June 30, 2023, KLAC’s total revenues were $2.36 billion, down 5.3% from the year-ago quarter. Its non-GAAP net income declined 2.4% from the previous-year quarter to $743 million. The company’s non-GAAP net income per share fell 1.6% year-over-year to $5.40.
Past and Expected Financial Performance
AVGO’s revenue and levered FCF grew at CAGRs of 15.2% and 6.9%, respectively, over the past three years. Analysts expect AVGO’s EPS to increase 4.8% in the current quarter, 8% in the next quarter, and 12% in the current year. The company’s revenue is expected to grow 3.9% in the current quarter, 5.9% in the next quarter, and 7.9% in the current year.
In comparison, KLAC’s revenue and levered FCF have grown at CAGRs of 21.8% and 28.8%, respectively, over the past three years. The company’s revenue is expected to decrease 13.7% in the to-be-announced quarter, 19.9% in the current quarter, and 8.9% in the current year. Its EPS is expected to fall 23.9% in the to-be-announced quarter, 25.2% in the current quarter, and 10.8% in the current year.
Profitability
AVGO is more profitable, with trailing-12-month gross profit and net income margins of 74.27% and 39.25%, respectively, compared to KLAC’s 59.81% and 32.27%.
Furthermore, AVGO’s trailing-12-month EBIT and EBITDA margins of 45.70% and 57.34% are higher than KLAC’s 38.04% and 41.99%.
Valuation
In terms of forward non-GAAP PEG, KLAC is currently trading at 1.89x, which is higher than AVGO’s 1.74x. Also, KLAC’s forward P/E multiple of 20.75 is lower than KLAC’s 21.33.
So, AVGO is relatively affordable here.
POWR Ratings
AVGO has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, KLAC has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. AVGO has a B grade in Sentiment, in sync with favorable analysts’ estimates. However, KLAC has a C in Sentiment, which is consistent with its mixed analysts' estimates.
Among the 90 stocks in the Semiconductor & Wireless Chip industry, AVGO is ranked #11 while KLAC is ranked #30.
Beyond what is stated above, we have also rated the stocks for Value, Growth, Momentum, Stability, and Quality. Click here to view all the AVGO ratings. Also, get all the KLAC ratings here.
The Winner
Semiconductors are vital for both economic competitiveness and national security. Their continuous innovation is pivotal for advancing the global economy in the digital era, encompassing AI, 5G, augmented reality, IoT, Industry 4.0, and self-driving cars.
Moreover, the expanding use of consumer electronics products worldwide drives this market's expansion.
While both the companies stand to capitalize on the industry tailwinds, AVGO’s robust financial performance in the previous quarter, solid profitability margins, promising analysts estimates, and attractive valuation multiples make it a better investment choice than KLAC.
Our research shows that the odds of success increase when one invests in stocks with an overall POWR Rating of Strong Buy or Buy. View all the other top-rated stocks in the Semiconductor & Wireless Chip industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
AVGO shares were trading at $912.84 per share on Thursday afternoon, up $38.28 (+4.38%). Year-to-date, AVGO has gained 66.21%, versus a 15.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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