The semiconductor industry is booming as it powers everything from smartphones, computers and automobiles to advanced medical devices. Growing trends such as 5G, artificial intelligence (AI) and the Internet of Things (IoT) will only continue to drive this demand, which is why investors are viewing semiconductor companies as promising investment opportunities.
The semiconductor industry is competitive. Only those companies that can maintain their technological leadership and stay ahead of the competition will survive. Here, we look at two leading semiconductor companies that are poised to not only survive, but thrive as the AI market grows.
Broadcom Case Study
Broadcom (AVGO), with a market capitalization of $726.9 billion, is not just a semiconductor company but also provides infrastructure software solutions. AVGO serves a variety of markets, including data center, networking, broadband, wireless communications, and storage.
Broadcom recently announced a 10-for-1 split of its common stock in the second quarter of fiscal 2024 to make it more accessible to investors. So far this year, AVGO shares have risen 41.7%, outpacing the 14.5% gain in the tech-heavy Nasdaq Composite Index.
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Broadcom has consistently demonstrated strong revenue growth driven by a diverse product portfolio and smart, timely acquisitions. The semiconductor business contributed 58% of total revenue in the second quarter, with the remainder coming from the infrastructure software division.
Revenues from its semiconductor solutions division rose 6% to $7.2 billion, while infrastructure software revenues increased 175% year over year to $5.28 billion. The company bolstered its infrastructure software division with the acquisition of cloud software company VMware for $61 billion in 2023.
Management attributed the results to growing demand for AI and the contribution of its VMware acquisition, which it expects to generate $51 billion in revenue in fiscal 2024, up 42% from fiscal 2023.
Broadcom’s total revenue increased 43% to $12.5 billion, and adjusted diluted earnings increased 6.2% to $10.96 per share. Broadcom is also an income stock known for paying a stable dividend. The company’s dividend yield is 1.34%, slightly below the technology sector average of 1.37%. For the fourth quarter of fiscal 2023, Broadcom increased its quarterly dividend by 14% to $5.25 per share.
Broadcom has a track record of increasing its dividend every year, especially over the past 14 years. The company’s low dividend payout ratio of 36.5% suggests there is room for dividend increases. The company generated $5.3 billion in free cash flow (FCF) and has a very high debt-to-equity ratio of 1.06, which should enable it to continue paying its dividend and paying down its debt.
Broadcom will report its third-quarter results on Sept. 5. Analysts expect AVGO to report GAAP earnings of $0.56 per diluted share on revenue of $12.96 million, up 42.2%.
Analysts expect AVGO’s earnings to grow 12.4% in fiscal 2024 and 27.6% in fiscal 2025. Given the exploding demand for AI solutions, AVGO is trading at 25 times its expected 2025 earnings, making it a reasonable semiconductor stock to buy now.
What is Wall Street saying about Broadcom stock?
On Wall Street, AVGO stock has an overall rating of “Strong Buy.” Of the 32 analysts covering the stock, 29 have rated it a “Strong Buy,” while 3 have recommended a “Hold.”
Based on AVGO’s average price target of $190.51, the stock could see upside of 21% from current levels, plus the high-end price forecast of $240 suggests the stock could rise up to 52.6% over the next 12 months.
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Broadcom has a strong track record of revenue growth, profitability, and shareholder returns. Its focus on high-growth areas like 5G, data center, and infrastructure software has positioned it well for the future. With a balance of growth and earnings potential, Broadcom is a great semiconductor stock to buy now.
Qualcomm’s case
Qualcomm Incorporated (QCOM) is a leading global technology company best known for its innovations in wireless communications, particularly the development of 3G, 4G and 5G technologies.
QCOM shares are valued at $188.7 billion and have risen 14.9% since the beginning of the year, roughly in line with the Nasdaq’s gains.
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Qualcomm’s revenue comes primarily from two segments: Qualcomm CDMA Technologies (QCT), which includes the company’s semiconductor business, which grew 12% in the third quarter, and Qualcomm Technology Licensing (QTL), its other segment, which offers licenses to its extensive patent portfolio, which grew 3% year over year.
The smartphone market has struggled for a while, but is finally starting to recover thanks to AI. Device chip sales increased 12% to $5.8 billion in the quarter. Automotive chip sales increased 87%, while IoT chip sales fell 8%.
Total revenue increased 11% year over year to $9.4 billion, and adjusted earnings per share (EPS) increased 25% to $2.33 per share.
Qualcomm has launched its next-generation AI products, the Snapdragon X series for PCs and the Snapdragon 8 Gen 3 for smartphones, and is likely to continue to generate revenue. Analysts covering Qualcomm stock expect consistent earnings growth over the next two years. Adjusted earnings per share are expected to grow 19% in fiscal 2024 and 11.9% in fiscal 2025. Trading at 15 times projected 2025 earnings, Qualcomm looks like a cheap semiconductor stock to buy now.
Qualcomm pays an attractive 2.01% dividend yield, above the industry average. The company has increased its dividend for the past 22 years. Additionally, Qualcomm is on the verge of becoming a Dividend Aristocrat, a designation given to S&P 500 companies that have increased their dividends for 25 consecutive years. The company’s low dividend payout ratio of 30.4% suggests the dividend may grow in the future. Qualcomm paid out $949 million in dividends in the third quarter.
What is Wall Street saying about Qualcomm stock?
Overall, Wall Street rates QCOM stock as a “Moderate Buy.” Of the 29 analysts covering the stock, 16 rate it a “Strong Buy,” 1 rate it a “Moderate Buy,” 11 rate it a “Hold,” and 1 rate it a “Strong Sell.”
Based on the average price target of $213.99, QCOM shares could see an upside of 28.8% from current levels, while the high price target of $270 could see an upside of 62.5% over the next 12 months.
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Qualcomm is well positioned for the future with its leadership in 5G technology, expansion into new markets such as automotive and IoT, and its lucrative licensing business.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information please see Barchart’s disclosure policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
