It’s a great time to invest in the fast-growing artificial intelligence (AI) industry. The AI market is expected to surpass $184 billion this year and is expected to reach over $826 billion by 2030.
Among AI technology stocks, semiconductor companies Broadcom(NASDAQ:AVGO) And Advanced micro devices(NASDAQ: AMD) are two to invest in. The growth of the AI industry has led to outsized sales for both as customers flocked to their offerings.
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But if you had to choose between the two, is one a better AI stock than the other? Let’s compare Broadcom and AMD to help you decide which is the better long-term AI investment.
Broadcom is basking in the AI fervor as revenue grew 47% year over year to $13.1 billion in the fiscal third quarter ended August 4. That’s an impressive increase, but 43% of the growth came from the acquisition of VMware, which closed last November.
VMware is known for its virtualization software, which allows IT organizations to run multiple operating systems on a single server. But private AI technology appears to be a key strategic factor behind Broadcom’s acquisition.
Private AI protects a company’s data from being accessed by any AI system other than those designated by the company. This is important because AI technology requires mountains of data, coming from a variety of sources, including from companies that have data stored in the cloud. Broadcom believes that some companies do not want their data shared with other companies via AI, whether for the protection of intellectual property or to comply with regulatory requirements.
Broadcom’s private AI offering is built on the VMware Cloud Foundation (VCF) platform. VCF represented more than 80% of VMware products booked in the third quarter. This illustrates the strong customer demand for VCF and its ability to create a private AI for businesses.
Broadcom also generates AI-related sales from a range of semiconductor products, including those for the computer networking, storage and broadband industries. The Semiconductor Solutions division contributed $7.3 billion to the $13.1 billion in third quarter revenue, up 5% year over year.
AMD’s strategy to capture AI market share is for its semiconductor products to focus on accelerated computing. This computing architecture processes data-intensive work separately from other computing tasks handled by a traditional CPU. This allows complex software applications, such as AI, to work faster and more efficiently.
AMD’s focus on accelerated computing has been key to its success in the AI era. Big tech customers, like Facebook parent Metaplatformsflock to its products. For example, Meta purchased 1.5 million units of AMD’s EPYC computer processor for its cloud computing servers, which house AI systems.
This customer demand resulted in 18% year-over-year revenue growth to $6.8 billion in AMD’s fiscal third quarter ended September 28. Additionally, the company expects fourth quarter revenue to accelerate to approximately $7.5 billion, up 22% year over year. -annual increase.
AMD’s sales success has led to strong financials across the board. The gross margin in the third quarter increased from 47% last year to 50%. This brought third quarter net profit to $771 million, an increase of 158% from the previous year. This allowed diluted earnings per share (EPS) to rise to $0.47, an increase of 161% year over year.
Both Broadcom and AMD have AI strategies with the ability to benefit from the growing AI market in the long term. This makes picking just one of these AI stocks a challenge. So which one wins?
One factor in Broadcom’s favor is that it offers a dividend, while AMD does not. Broadcom’s forward dividend yield stands at a solid 1.3% at the time of writing.
However, excessive debt can jeopardize the dividend. At the end of its fiscal third quarter, Broadcom was carrying nearly $70 billion in debt. This resulted in more than $1 billion in interest payments in the third quarter, contributing to the quarter’s net loss of $1.9 billion.
Meanwhile, AMD’s debt was a manageable $1.7 billion at the end of its fiscal third quarter. With cash and equivalents of $3.9 billion in the third quarter, AMD’s net debt was effectively zero.
Another consideration is the price-to-earnings (P/E) ratio for each company. This metric is a way to assess the relative value of a stock by telling you how much investors are willing to pay for each dollar of income.
AMD’s price-to-earnings ratio was much higher than Broadcom’s earlier in 2024, but has recently fallen. It’s below Broadcom’s at the time of writing, suggesting AMD stock is the better value now.
Given these factors, as well as its success in accelerated computing, AMD is the better AI stock to invest in the secular artificial intelligence trend right now.
If our analyst team has a stock tip, it could be worth listening to. After all, Stock Advisors the total average return is 908% – a market-shattering outperformance compared to 174% for the S&P 500.*
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*Stock Advisor returns November 18, 2024
Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Robert Izquierdo has positions in advanced microdevices and metaplatforms. The Motley Fool holds positions in and recommends advanced microdevices and metaplatforms. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Better Artificial Intelligence Stock: Broadcom vs. AMD was originally published by The Motley Fool
