The past year has been a solid one for semiconductor companies, as evident from the 21% gains clocked by the PHLX Semiconductor Sector index during this period. But not all semiconductor stocks have benefited from the broader market's rally.
For instance, while shares of Broadcom (AVGO 0.25%) have jumped an impressive 115% in the past year, Advanced Micro Devices (AMD 3.93%) stock has headed in the opposite direction and lost 14% of its value. Both companies play a key role in the semiconductor market as they design chips that are used in personal computers (PCs), smartphones, gaming consoles, and data centers.
Let's take a closer look at the prospects of both of these semiconductor stocks and determine which is the better buy following their contrasting performances in the past year.
The case for AMD
While 2024 was a bad year for AMD, the company could witness a nice turnaround in 2025 thanks to the sunny prospects of the PC and data center markets. A closer look at AMD's third-quarter 2024 results (released in October 2024) tells us that a turnaround is already in progress.
The chipmaker's quarterly revenue increased 18% year over year to $6.8 billion, along with a 31% spike in its earnings per share to $0.92 per share. AMD is forecasting a year-over-year increase of 22% in its revenue for the fourth quarter to $7.5 billion. Analysts are projecting the company's earnings to increase by 41% to $1.09 per share.
The forecast for 2025 is rosier. AMD's bottom line is projected to jump by 54% in the new year to $5.13 per share on the back of a 27% spike in its revenue to $32.5 billion. It is easy to see why analysts are expecting AMD to step on the gas in 2025. The company's data center business gained momentum throughout 2024 as AMD was able to attract more customers for its graphics processing units (GPUs) used in servers for artificial intelligence (AI) model training and inference.
AMD was originally expecting to sell $2 billion worth of data center GPUs in 2024, but it has increased that forecast to more than $5 billion. The company could witness further growth in this segment in 2025 thanks to an improved supply chain, which should allow AMD to fulfill more demand for its AI GPUs. Meanwhile, CEO Lisa Su points out that PC OEMs (original equipment manufacturers) are set to triple the number of products powered by AI-capable Ryzen PC processors in 2025.
As a result, it won't be surprising to see AMD gaining a greater share of the client CPU market. Mercury Research reports that AMD's share of the client CPU market increased by 4.6 percentage points year over year in the third quarter of 2024 to 23.9%. AMD's solid positioning in AI PCs should allow it to grab a bigger chunk of this space in 2025, which should be good enough to help the company maintain its outstanding growth in this segment.
In all, there are a lot of positives for AMD in the new year, which could help this chip stock come out of the rut that it's in. AMD carries a median 12-month price target of $183 based on 55 analysts covering it, which points toward 46% upside from current levels.
The case for Broadcom
Broadcom is already a bigger player in the AI chip market than AMD. It generated $12.2 billion in revenue last fiscal year from sales of its custom AI processors and networking chips, which was a massive jump of 220% from the preceding year. More importantly, AI has set the stage for terrific long-term growth at Broadcom since the company sees its addressable market in this space increasing to a range of $60 billion to $90 billion by fiscal 2027.
Broadcom is in a robust position to make the most of this lucrative growth opportunity as it controls 55% to 60% of the custom processor market. Assuming Broadcom manages to hold on to a 60% share of this market after three years and the size of the custom processor market increases to $75 billion (based on the midpoint of its guidance range), its AI revenue could jump to $45 billion after three years.
That would be a big jump of almost four times over the revenue that the company generated from this segment in fiscal 2024. The impressive performance of Broadcom's AI-specific semiconductor business has been solid enough to help the company offset the weakness that it is facing in the non-AI semiconductor business.
More specifically, Broadcom's non-AI semiconductor revenue fell 23% year over year in the fourth quarter of fiscal 2024 to $4.5 billion. That was in sharp contrast to the 150% year-over-year increase in AI semiconductor revenue to $3.7 billion. The good part is that Broadcom's non-AI semiconductor business has hit a bottom already and the company is expecting a recovery in this segment going forward.
As such, it is not surprising to see that Broadcom's growth in fiscal 2025 is expected to be stronger than last year. The company finished fiscal 2024 with organic revenue growth of 9%. Its top line came in at $51.6 billion for the quarter. As the following chart tells us, Broadcom is expected to step on the gas in fiscal 2025, followed by healthy growth over the next couple of years as well.
AVGO Revenue Estimates for Current Fiscal Year data by YCharts
So, Broadcom is likely to remain a top semiconductor stock going forward thanks to its sunny prospects in AI and a potential recovery in other markets. But is it worth buying this chipmaker over AMD following the outstanding gains that it has delivered in the past year?
The verdict
We have seen that both AMD and Broadcom are likely to deliver robust growth in 2025 and beyond, suggesting that both semiconductor stocks may be worth buying right now. However, Broadcom is trading at a richer valuation than AMD following its impressive surge in the past year. This is evident in the chart below.
AVGO PE Ratio data by YCharts
Broadcom's sales and earnings multiples are well above AMD's. Of course, Broadcom's dominant position in the custom AI processor market explains why it deserves that rich valuation. However, AMD is expected to deliver faster growth in the new year. That's why investors looking for a growth stock that's trading at an attractive valuation are likely to prefer buying AMD over Broadcom as the former could come out of its slump and soar higher in 2025.
