Demonstrating Superior Artificial Intelligence Potential: Wolfspeed versus Broadcom
The explosive growth in the artificial intelligence (AI) market is providing a significant boost to numerous chipmakers. Amongst the notable beneficiaries, Nvidia stands out as the leading manufacturer of high-end data center GPUs, witnessing a staggering 2,470% surge in its stock price over the past five years.
However, apart from Nvidia, two other chipmakers are expected to flourish due to this persistent trend: Wolfspeed and Broadcom. This piece will explore which of these two stocks represents a more enticing investment opportunity in the booming AI market.
Unraveling Differences between Wolfspeed and Broadcom
Exploring the Wolfspeed Terrain
Formerly christened as Cree, Wolfspeed is recognized as a leading manufacturer of wide-bandgap (WBG) semiconductors, using silicon carbide and gallium nitride materials. These WBG chips display exceptional robustness, facilitating them to operate efficiently at high voltages, temperatures, and frequencies. Consequently, they are utilized in various applications, including short-length LEDs, lasers, 5G base stations, military radars, electric vehicles (EVs), solar panels, wind turbine systems, and power supply units for AI servers.
The EV market has traditionally served as a significant demand source for Wolfspeed’s chips. However, its growth has been hindered by the industry's sluggish pace over the last two years.
Broadening the Scope of Broadcom
Broadcom, originally known as Avago and later absorbing the original Broadcom brand in 2016, is a multifaceted tech giant boasting a diversified semiconductor division. Its offerings span a broad range of chips designed for mobile, wireless, networking, data storage, and industrial markets. Additionally, its infrastructure software business, bolstered by acquisitions of CA Technologies, Symantec’s enterprise security division, and VMware, offers a mix of on-premises and cloud-based solutions.
Broadcom's recent growth has been largely attributed to the AI market, driving more sales of its networking and optical chips to data center operators. The firm anticipates its AI-focused segment to counterbalance slower sales in other areas and infrastructure software.
Which Chipmaker is Propelling Faster?
Wolfspeed's Progression
Wolfspeed managed to increase its revenue by 42% during its fiscal 2022 (ending in June 2022), benefiting from recovery in pandemic-related business constraints and rising EV sales. In fiscal 2023, revenues registered a 24% rise, before a 6% expansion during fiscal 2024.
The deceleration in Wolfspeed's growth can be attributed to the cooling EV market, a spike in AI GPU purchases that negatively affected the demand for silicon carbide chips, and China's export bans on gallium and germanium, exacerbated in the wake of an escalating tech sector conflict. Consequently, its adjusted gross margin dipped from 36% in fiscal 2022 to a mere 13% in fiscal 2024. The firm remains unprofitable according to generally accepted accounting principles (GAAP). In fiscal 2025, analysts expect its revenue to dip 2% to $790 million, with its net loss projected to widen to $975 million.
Despite the cyclical downturn, Wolfspeed continues to expand its New York and North Carolina plants, aiming to reduce die costs by at least 50% over subsequent years. While this strategy could potentially yield long-term gains, the recent dismissal of CEO Gregg Lowe could complicate its implementation.
Broadcom's Advancement
Broadcom recorded a 21% revenue increase in its fiscal 2022 (ending in October 2022), with pandemic-related constraints starting to dissipate. Subsequently, revenues grew 8% in fiscal 2023 and a substantial 44% in fiscal 2024.
Broadcom's impressive revenue surge during fiscal 2024 was primarily driven by the acquisition of Vmware, concluded in November 2023, and an exponential surge in sales of its AI-centric data center chips, which expanded to $12.2 billion, representing 24% of its total revenue.
In fiscal 2025, analysts predict a 19% revenue uptick and a more than tripling of its GAAP EPS. Adjusted EBITDA is anticipated to grow by 26%.
Which Stock is a More Attractive Investment?
The $6.1 billion enterprise value assigned to Wolfspeed imposes an enterprise value-to-sales (EV/S) ratio of 8. Although Broadcom appears more expensive with an enterprise value of $1.13 trillion and an EV/S ratio of 19, its adjusted EBITDA remains profitable. Given the discrepancy in their financial health, Broadcom poses the more compelling investment opportunity at present.
Broadcom is a larger and more diversified company, boasting a stronger position within the AI market, growing at a faster rate, and being consistently profitable. While Wolfspeed's business may recover, the EV market would need to rebound, the company should strategically allocate additional investment in its infrastructure, and secure a new, reliable CEO to chart its future course. In the meantime, Broadcom offers a predictable growth trajectory in a robust, expanding market.
- Investors interested in the AI market might consider Broadcom, as its recent growth has been fueled by this sector and it anticipates its AI-focused segment to offset slower sales in other areas.
- In contrast to Broadcom, Wolfspeed's growth has been impacted by the sluggish EV market and the spike in AI GPU purchases, which negatively affected the demand for its silicon carbide chips.
- Analysts forecast that Broadcom's revenue will increase by 19% in fiscal 2025, and its GAAP EPS will more than triple, while Wolfspeed's revenue is projected to decline by 2% and its net loss is expected to widen.
- By 2025, Broadcom's adjusted EBITDA is anticipated to grow by 26%, making it a more profitable investment option compared to Wolfspeed, which remains unprofitable according to GAAP.
