Broadcom (AVGO) and NVIDIA (NVDA) have both emerged as top-performing semiconductor giants in 2024, benefiting from the unprecedented demand for chips, particularly in the AI and high-performance computing (HPC) sectors. While I hold a Buy rating for both AVGO and NVDA, I prefer Nvidia over Broadcom due to its stronger cash flow growth, higher free cash flow margin, and dominant position in the rapidly expanding AI market, which justifies its premium valuation.
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In this article, I will explore the bullish theses for both companies, focusing on their cash generation, long-term prospects, and valuation.
Broadcom and Nvidia’s Key Comparisons and Differences
Before diving into the bullish thesis for these two companies, it’s useful to first outline the similarities and differences between these two semiconductor giants, especially since they specialize in distinct areas and serve somewhat different markets.
Broadcom focuses on networking and communication technologies, offering chips for Ethernet, broadband modems, routers, and wireless solutions like Wi-Fi, Bluetooth, and GPS. It also plays a key role in mobile devices, with 20-25% of its revenue coming from Apple.
Nvidia, a leader in graphics processing units (GPUs), specializes in AI and high-performance computing. Its GPUs power data centers, AI research, and autonomous vehicles, with Nvidia continuing to expand its presence in these fast-growing markets.
To put it in an analogy, Broadcom could be compared to the infrastructure that enables seamless interaction and data flow between different devices and systems, much like roads and bridges in a city. Nvidia, in contrast, would be the high-performance vehicles that travel on those roads, offering cutting-edge hardware to drive performance in AI, gaming, and computing applications.
Broadcom and Nvidia’s Cash Flow Overview
To be clear, while I hold a bullish outlook for both Broadcom and Nvidia, comparing their cash flow statements would likely provide the most insightful and actionable information when deciding which company to invest in. This is because cash flow is crucial for understanding whether a business is truly profitable in terms of real, liquid funds, and for evaluating how a company is investing in its future.
Broadcom
Starting with Broadcom, the company reported operating cash flows of $19.2 billion over the past twelve months, marking a 10.8% annual increase. Its capital expenditures were low, totaling $122 million in Q4 and $531 million for the year. This lean approach to capital spending provides ample room for the company’s shareholder-friendly capital allocation policy. For example, in Fiscal 2024, Broadcom distributed $9.2 billion in dividends and $11.7 billion in share buybacks, which exceeds its $18.65 billion in free cash flow for the year. This suggests that part of the capital returns were likely funded by debt.
It’s worth noting that Broadcom’s acquisition of VMware, valued at around $61 billion in 2022, was one of the largest deals in the semiconductor industry. As of November 2024, Broadcom’s total debt has reached $67.5 billion while Nvidia’s debt is significantly lower at $10.2 billion.
However, if we consider Broadcom’s free cash flow of $18.65 billion and $46.81 billion in revenues over the last twelve months, the free cash flow margin stands at approximately 39.8%, providing a strong foundation for the company to continue executing its business strategy. This supports growth while maintaining a balance between its M&A ambitions and its shareholder-friendly approach.
Nvidia
On the Nvidia side, the company reported operating cash flows of $58.9 billion over the last twelve months, representing a 213% year-over-year increase. In Fiscal 2024, cash from operations surged by 398%, following a 38% decline in Fiscal 2023. Capital expenditures, like those of Broadcom, are quite lean, with Nvidia reporting only $2.4 billion in the last twelve months—just 2% of its $113.3 billion in revenue for the same period.
That said, Nvidia is not traditionally shareholder-friendly, with a dividend and buyback yield below 1%. However, it returned 51.6% of its $56.5 billion in free cash flow through $688 million in dividends and $28.5 billion in buybacks. While the yield is low, this shows Nvidia is efficiently using its capital to return a significant portion of free cash flow to shareholders.
When we examine Nvidia’s free cash flow margin, considering the $113.3 billion in revenues generated in the past twelve months, the margin stands at approximately 49.9%, which is higher than Broadcom’s already impressive margin. In other words, for every dollar generated in revenue, nearly fifty cents is converted into free cash flow. This highlights Nvidia’s impressive operational efficiency, not only within the technology sector but also in comparison to many companies across other industries.
A Quick Look at Valuations Adjusted for Growth
Moving on, despite both Broadcom and Nvidia’s highly efficient cash flow generation supporting a clear bullish outlook, it’s also important to consider the valuations at which they trade when adjusted for forecasted growth.
Broadcom trades at 36x its forward cash flow multiple, while Nvidia trades at 46x. Nvidia’s premium is supported by its higher free cash flow margin and projected 191% growth in free cash flow per share over the next two Fiscal years, compared to 28% for Broadcom.
However, it’s important to note that Broadcom has a more mature business model and its higher debt may limit its growth, while Nvidia is well-positioned for aggressive expansion. This justifies Nvidia’s 10x higher forward cash flow multiple, particularly in the high-growth AI sector, where it is well-positioned to continue its dominance.
Is AVGO a Good Stock to Buy?
The consensus on AVGO from Wall Street analysts is a Strong Buy, with 23 out of 26 analysts being bullish on the stock. The average AVGO price target is $230.78, implying a 3.93% downside potential.
Is NVDA a Good Stock to Buy?
Similarly, Wall Street analysts also rate NVDA as a Strong Buy, with 37 out of 40 analysts recommending a Buy on the stock. The average NVDA price target is $177.14, suggesting a 35.85% upside potential.
Key Takeaway
The future looks promising for both Broadcom and Nvidia, as they are two of the best-positioned semiconductor companies likely to benefit from the growing demand for AI technologies. While I rate both as a Buy, if I were to choose one, I believe Nvidia is currently the better investment. This is based on its stronger cash generation and its position in more advanced growth stages compared to Broadcom, which operates a more mature business. Given these factors, a premium valuation based on cash flows seems justified, in my opinion.
