Why Is Broadcom Stock a Winner? It's the Difference Between Nvidia and Apple. -- Barrons.com

Al Root

Semiconductor stocks are sliding -- except for Broadcom. The reason appears to come down to the difference between Apple and Nvidia -- and valuation.

Many chip stocks are having a dreadful month of trading. Through midday trading on Thursday, Intel and AMD shares are down 17% and 18%, respectively. The iShares Semiconductor ETF was down about 4%. Broadcom stock, up about 4%, is one of the few standouts.

Business mix explains a lot of that -- and yes, mix boils down to artificial intelligence.

Chip-making giant Taiwan Semiconductor Manufacturing reported first-quarter numbers on Thursday. Sales and earnings were a little better than expected. Sales guidance for the second quarter, at about $20 billion, was a touch better than Wall Street projections.

Still, shares are down 4% in midday trading. The issue appears to be while demand for artificial intelligence chips is booming, demand for everything else is so-so.

"First quarter revenue decreased 5.3% sequentially...as our business was impacted by smartphone seasonality, partially offset by continued [high-performance computing-related] demand," said the company on its earnings conference call.

It's the difference between Apple and Nvidia. Smartphone demand is slowing while demand for A.I. chips is booming.

That's fine for Nvidia, which dominates A.I. chips for high-performance computing, with an estimated 80% market share of a $100 billion market. Intel and AMD have A.I. chip businesses too but it amounts to roughly 25% of sales versus roughly three-quarters of Nvidia's revenue.

It's better to have three-quarters of a business booming than just one-quarter. The outlook for everyone else other than Nvidia isn't as strong.

Nvidia stock was down about 3% over the past month, not too far off the 2% loss of the S&P 500. Still, shares were up 210% over the past 12 months.

Broadcom shares are up about 4% over the past month. It managed to buck the broader trend in chips, even though AI is only about a fifth of its business. Its earnings helped. Broadcom reported its fiscal first quarter which ended in January in early March. Sales and earnings were a little better than expected and the company left fiscal year 2024 sales guidance unchanged at $50 billion, right in line with Wall Street projections.

The results look similar to what Taiwan Semi just reported, still, Broadcom shares have done a little better than peers. Valuation might be part of the explanation. Broadcom shares stock trades for about 27 times estimated 2024 earnings, less than the 30 times multiple of the Philadelphia Semiconductor Index.

Sometimes, price matters.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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April 18, 2024 12:50 ET (16:50 GMT)

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