Broadcom (AVGO) vs. ASML (ASML) - Analyzing the Semiconductor Stock Leader

In this article, I have evaluated prominent semiconductor stocks, Broadcom Inc. (AVGO) and ASML Holding N.V. (ASML), to determine which is the better investment. After thoroughly evaluating these stocks, I think while AVGO could be a solid buy, waiting for a better entry point for ASML could be ideal for the reasons discussed in this article.

The expanding use of consumer electronics products worldwide is expected to expand the semiconductor market. Additionally, new potentials for market expansion are being created by the development of artificial intelligence (AI), the Internet of Things (IoT), and machine learning (ML) technologies. Due to these advancements, memory chips can process vast data more quickly.

As a result, the semiconductor industry is expected to reach $1.09 trillion by 2028, growing at a CAGR of 10.9%.

Despite facing shortage post-pandemic, the semiconductor industry’s importance to the world continues to grow as chips become an even greater presence in the essential technologies of today and gives rise to tomorrow's transformative technologies.

Implementation of the CHIPS Act has begun in earnest in 2023, and Semiconductor Industry Association seeks to play a constructive role to ensure the new law returns maximum benefits for America’s economy, national security, and supply chain resilience.

Following the introduction of the act, companies from around the world have announced several new semiconductor ecosystem projects in the U.S. totaling well over $200 billion in private investments.

AVGO has gained 83.4% over the past year as compared to ASML’s 14.5% gain. AVGO also gained 11.1% over the past month compared to ASML’s 15.1% gain.

Here are the reasons why I think AVGO might perform better in the near term:

Recent Developments

On November 22, 2023, AVGO announced that it had completed its acquisition of VMware, Inc. (VMW). VMW’s common stock would cease to be traded on the New York Stock Exchange (NYSE). This acquisition should boost the company’s capabilities.

Conversely, on October 25, 2023, ASML announced an expansion of its latest technology education program, the ASML Junior Academy, to the United States.

Recent Financial Results

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

On the contrary, ASML’s total net sales for the fiscal second quarter that ended October 2, 2023, increased 24.8% year-over-year to €6.68 billion ($7.30 billion). Its net income rose 11.3% year-over-year to €1.89 billion ($2.07 billion). Moreover, the company’s net income per ordinary share rose 12.1% year-over-year to €4.81.

Past and Expected Financial Performance

AVGO’s revenue has increased at a CAGR of 11.9% over the past year. Its revenue is expected to increase 46.2% in the current year ending October 2024 and 32.5% in the first quarter ending January 2024. Its EPS is expected to gain 3% this year, 4.5% in the current quarter ending January 2024, and 16.9% in the next quarter ending April 2024.

Conversely, ASML’s revenue has increased at a CAGR of 35.6% over the past three years. Its revenue is expected to increase 28.1% this year and 7.6% in the fourth quarter ending December 2023 but decline 9.1% in the next quarter ending March 2024. Its EPS is expected to gain 37.8% this year, marginally in the current quarter ending December 2023, but decline 15.3% in the next quarter ending March 2024.

Valuation

AVGO’s forward EV/EBITDA multiple of 18.86 is lower than ASML’s 26.21. AVGO’s forward non-GAAP P/E multiple of 23.51x is lower than ASML’s 32.86x.

Thus, AVGO is more affordable.

Profitability

AVGO's trailing-12-month EBITDA margin of 57.34% is higher than ASML’s 35.13%. In addition, AVGO’s trailing-12-month EBIT margin of 45.70% is higher than ASML’s 32.80%.

Thus, AVGO is more profitable.

POWR Ratings

AVGO has an overall rating of B, translating to a Buy, in our proprietary POWR Ratings system. Conversely, ASML has an overall rating of C, which equates to a Neutral. 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. Both the stocks have a C grade for Stability. AVGO has a beta of 1.12, while ASML has a beta of 1.16.

AVGO has an A grade for Quality. Its trailing-12-month gross profit margin of 74.27% is 52.6% higher than the industry average of 48.67%. On the other hand, ASML has a B grade for Quality, consistent as its trailing-12-month gross profit margin of 51.32% is 5.4% higher than the industry average.

Among the 92 stocks in the B-rated Semiconductor & Wireless Chip industry, AVGO is ranked #16, while ASML is ranked #27.

Beyond what we’ve stated above, we have also rated both stocks for Stability, Sentiment Momentum, Value, and Quality. Get all AVGO ratings here. Click here to view ASML ratings.

The Winner

The semiconductor industry is experiencing significant growth, largely propelled by the advancements in artificial Intelligence, the proliferation of smartphones, and the rising demand for memory chips. Industry players such as AVGO and ASML are well-positioned to benefit from these industry tailwinds.

However, ASML's poor profitability and higher valuation makes its competitor AVGO the better buy.

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

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AVGO shares were trading at $970.28 per share on Monday afternoon, down $8.59 (-0.88%). Year-to-date, AVGO has gained 76.67%, versus a 20.34% rise in the benchmark S&P 500 index during the same period.

Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.

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