Amid the dynamic upswing in global semiconductor demand propelled by technological leaps and integrations, I evaluated two prominent semiconductor stocks, NVIDIA Corporation (NVDA) and Broadcom Inc. (AVGO), to ascertain which holds the potential to yield superior returns this month. Let's understand this in detail.

The semiconductor demand stands resilient, affirmed by the Semiconductor Industry Association (SIA). The global semiconductors sales in October amounted to $46.6 billion, up 3.9% over September’s $44.9 billion. Moreover, worldwide semiconductor sales totaled $134.7 billion in the third quarter of 2023, a 6.3% rise from the second quarter.

The surge in demand for high-performance GPU-based servers and accelerator cards within data centers, propelled by advancements in generative AI (GenAI) and large language models, constitutes a significant driver of growth in the semiconductor industry.

The memory market, which is predicted to grow by more than 40% year-over-year to more than $130 billion in 2024, is the primary engine of the industry's expected growth. Other significant areas, such as discrete, sensors, analog, logic, and micro, are expected to grow in the single digits simultaneously.

Demand will rise further as a result of the ongoing development and integration of technologies such as 5G, AI, and the Internet of Things (IoT) in various industries. According to Gartner (IT), global semiconductor revenue will climb 16.8% to $624 billion in 2024.

Furthermore, as per a report by Mordor Intelligence, the semiconductor industry is expected to reach $1.09 trillion by 2028, rising at a CAGR of 10.9%.

In terms of price performance, NVDA has marginally declined over the past month, while AVGO gained 2.6% during the same period. Moreover, NVDA witnessed a 3.3% plunge over the past three months, while AVGO climbed by 3.6% over the same duration.

However, NVDA has surged 184.6% over the past year, closing the last trading session at $455.03, whereas AVGO has gained 71.9% during the same period, closing the last trading session at $903.64.

But which Semiconductor & Wireless Chip stock could be a better pick? Let's find out.

Recent Financial Results

For the fiscal 2024 third quarter that ended October 29, 2023, NVDA’s non-GAAP revenue increased 205.5% year-over-year to $18.12 billion. Its non-GAAP net income and non-GAAP EPS grew 588.2% and 593.1% from the prior year’s period to $10.02 billion and $4.02, respectively.

However, as of October 29, 2023, the company’s current liabilities amounted to $9.10 billion, compared to $6.56 billion as of January 29, 2023.

For the fiscal third quarter that ended July 30, 2023, AVGO’s non-GAAP net revenue grew 4.9% year-over-year to $8.88 billion. Its adjusted EBITDA rose 7.9% from the year-ago value to $5.80 billion. Also, the company’s non-GAAP net income and non-GAAP EPS grew 8.4% and 8.3% from the prior year’s period to $4.60 billion and $10.54, respectively.

Past and Expected Financial Performance

Over the past three years, NVDA’s revenue and EBITDA increased at 44.8% and 63.3% CAGR, respectively. Its net income and EPS grew at respective CAGRs of 70.3% and 70.5%, respectively. In addition, the company’s levered free cash flow rose at a 63.8% CAGR during the same period.

Analysts expect NVDA’s revenue to grow 231.1% year-over-year to $20.03 billion for the fourth quarter of fiscal year 2024, ending January 2024. In addition, the company’s EPS is expected to grow 411.2% from the prior year’s period to $4.50.

Over the past three years, AVGO’s revenue and EBITDA rose at a CAGR of 15.2% and 24.7%, respectively. Its net income and EPS grew 77.6% and 83.2% during the same period. Moreover, the company’s levered free cash flow increased at a CAGR of 6.9% during the same time frame.

For the fiscal fourth quarter ending October 2023, AVGO’s revenue is expected to increase 3.9% year-over-year to $9.28 billion. Similarly. the company's EPS for the ongoing period is expected to be $10.96, up 4.9% from the previous year’s quarter.

Valuation

In terms of forward P/E, AVGO is trading at 27.05x, 33.6% lower than NVDA, which is trading at 40.74x. Moreover, AVGO’s forward EV/Sales of 11.18x is 41.1% lower than NVDA’s 18.97x. In addition, AVGO’s forward EV/EBITDA of 17.45x compares with NVDA’s 33.79x.

Profitability

NVDA’s trailing-12-month revenue is 1.3 times that of what AVGO generates. However, AVGO is more profitable, with a trailing-12-month gross profit margin of 74.27%, compared to NVDA’s 69.85%. Additionally, AVGO’s trailing-12-month EBITDA margin and levered FCF margin of 57.34% and 38.97% compare with NVDA’s 49.39% and 31.46%, respectively.

POWR Ratings

NVDA has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, AVGO has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NVDA has a B grade for Quality. Its trailing-12-month EBITDA margin and levered FCF margin of 49.39% and 31.46% are 434% and 287.5% higher than the industry averages of 9.25% and 8.12%, respectively.

On the other hand, AVGO has an A grade for Quality, justified by its better profitability metrics. The stock’s trailing-12-month EBITDA margin and levered FCF margin of 57.34% and 38.97% are 520% and 380% higher than the industry averages of 9.25% and 8.12%, respectively.

In addition, NVDA has a D grade for Stability, justified by its 60-month beta of 1.69. In comparison, AVGO has a B grade for Stability, consistent with its 60-month beta of 1.12.

Of the 91 stocks in the Semiconductor & Wireless Chip industry, NVDA is ranked #29, while AVGO is ranked #13. 

Beyond what we've stated above, we have also rated both stocks for Growth, Value, Momentum, and Sentiment. Click here to view NVDA’s ratings. Get all AVGO ratings here.

The Winner

Given the robust demand for semiconductors fueled by technological advancements and integration, both NVDA and AVGO are poised to capitalize on the sector's growth. Nevertheless, AVGO's superior financial performance, heightened profitability, and discounted valuation make it a more favorable investment choice over NVDA this month.

Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Semiconductor & Wireless Chip industry here.

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NVDA shares were trading at $462.05 per share on Thursday afternoon, up $7.02 (+1.54%). Year-to-date, NVDA has gained 216.31%, versus a 21.07% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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