In this piece, I evaluated two semiconductor stocks: Intel (INTC) and Broadcom (AVGO). A closer look suggests a bearish view for Intel and a neutral view for Broadcom.
While both companies are involved in the semiconductor business, Intel focuses more on data centers, the Internet of Things, PCs, and platform products. In contrast, Broadcom is known for its artificial intelligence chips, although it also makes chips for enterprise uses, the cloud, and data centers. Additionally, Broadcom is a fabless company, meaning it doesn’t manufacture its own chips, while Intel does manufacture its own semiconductors.
In terms of share price, Intel stock has tanked 62% year-to-date, dragging its 12-month return into the red at 50%. Meanwhile, Broadcom shares have surged 34% year-to-date and soared 75% over the past year.
With such a dramatic difference in their share price performances, the wide gap between their valuations is no surprise. We compare their price-to-earnings (P/E) ratios to gauge their valuations against each other and that of their industry.
For comparison, the semiconductor industry is trading at a P/E of 51.3x, versus its three-year average of 36.7x.
Intel
At a P/E of 85.65x, Intel is trading at a sizable premium to its industry despite the growing number of problems at the chipmaker. While its forward P/E of 53.8x is far more encouraging, there are too many question marks right now to say just how accurate that might be. Thus, a bearish view seems appropriate for Intel stock at this time.
For example, the chipmaker is looking at selling off chunks of its business as part of its massive restructuring efforts. Intel CEO Pat Gelsinger told Yahoo! Finance after the company’s earnings results that it’s the “biggest restructuring of Intel… since the memory microprocessor decision four decades ago.”
As part of this strategy, Gelsinger is said to be considering an initial public offering of Altera, Intel’s chipmaking division, along with the potential sale of its foundry business.
Moreover, Intel reportedly wants to unload at least some of its stake in Mobileye (MBLY). Additionally, Qualcomm (QCOM) might be interested in purchasing Intel’s design divisions, especially its client PC design operations.
Further, Intel’s potential fire sale is jeopardizing the $19.5 billion in grants and loans it was set to receive from the U.S. Chips and Science Act. The funds were meant to support Intel’s domestic chip production, but its recent cutbacks raise doubts about whether it will secure any of the money.
Ultimately, Intel will need time to streamline its operations, and by the end of the process, Intel may look quite different than it does today. As a result, investors might want to steer clear of this stock, at least until some light appears at the end of the tunnel.
What Is the Price Target for INTC Stock?
Intel has a Hold consensus rating based on one Buy, 26 Holds, six Sells, and one Buy rating assigned over the last three months. At $26.09, the average Intel stock price target implies an upside potential of 37.46%.
Broadcom
At a P/E of 122.6x, Broadcom certainly isn’t cheap, although its forward P/E of 23.8x suggests analysts expect its earnings to explode. However, investors may have missed the latest buy-the-dip opportunity at this point, suggesting a neutral view might be appropriate in the near term.
Examining Broadcom’s latest quarterly results reveals that the company disappointed investors, as the results did not sufficiently surpass expectations. Also, the company’s outlook fell short as it projected $14 billion in revenue for the current quarter, slightly below the expected $14.1 billion in sales.
Following the release of the earnings report, Broadcom’s shares tumbled 10%, creating a buy-the-dip opportunity for investors. However, the selloff didn’t last long as the stock quickly began to creep back up. On Tuesday alone, as of midmorning, the stock was already up 3%.
Essentially, Broadcom shares are again priced for perfection, suggesting another disappointment could be on tap with the next earnings report. As a result, investors who watch and wait patiently should be able to pick up some Broadcom shares at a discount with any other sign of temporary weakness in the company or its stock.
What Is the Price Target for AVGO Stock?
Broadcom has a Strong Buy consensus rating based on 23 Buys, three Holds, and zero Sell ratings assigned over the last three months. At $198.66, the average Broadcom stock price target implies an upside potential of 34.04%.
Conclusion: Bearish on Intel, Neutral on Broadcom
The theses for Intel and Broadcom couldn’t be further apart. While Broadcom earns a neutral rating, investors shouldn’t lose money by picking up shares even at the current price, especially given its low forward P/E — as long as they buy and hold for the long term.
Conversely, Intel’s future just looks too uncertain. I could become more constructive on the shares if the company starts to create shareholder value through spin-offs, sales, and splits. However, the elimination of the dividend suggests it could be a while before we see any value creation.
