Everyone in the market is excited about the new breakouts in the technology stock space, with a particular focus on names like NVIDIA (NASDAQ: NVDA), termed the king of the pack. After breaking past its all-time high prices as if there were no barriers, expanding financials and increased demand from the artificial intelligence capabilities, the company offers helped the stock break past all its ceilings.
However, when one stock gets too crowded with an audience that isn’t necessarily in the name for the long-term potential the company offers, future behavior can quickly become speculative and volatile. This is why looking into other names in the semiconductor industry could be a sensible way to reduce the number of red days in your portfolio.
For reasons that will become clear in just a bit, you will find out why the biggest institutions are looking to buy Broadcom Inc. (NASDAQ: AVGO) as a cheaper alternative to get the same—if not more—upside that is left in the leader of the pack, NVIDIA. Before you go deeper into the weeds of it all, this is why Broadcom is only a small piece of the industry rally pie.
Stand Out from the Crowd
Following the same indicators that professional traders and investors tend to follow to find the best places to allocate some of their capital, this is what you find. According to the ISM manufacturing PMI index, the computer and electronic products industry has been contracting for six consecutive months.
However, not all computer and technology stocks are made equal. After falling by as much as 15% over the past month, Apple Inc. (NASDAQ: AAPL) is on the losing end of the industry; all the while, Broadcom rose by 22%. The market tells you Broadcom is better positioned for what is coming to the industry.
Because Broadcom enables some of the infrastructure software that the United States – and other nations – need to build out their internet and communications capabilities, some of Wall Street’s biggest players are looking to get more exposure to this name.
One reason for this newfound interest is the growing adoption of a work-from-home model, or as is more commonly applied now, a hybrid setting. People must ensure their WiFi infrastructure is up to par to complete their jobs and allow bandwidth for other activities such as streaming and entertainment.
Of course, these trends are hard to quantify, but the market’s dealing in numbers is straightforward. As it trades at 94% of its 52-week high price, Broadcom stock has shown more than bullish momentum in the past months, with more to come behind this behavior to push it higher.
You can look away from the hype surrounding NVIDIA today and find a similar upside for a much lower price. Here is how Broadcom becomes a much better deal to still get behind the spillover effect from NVIDIA’s massive run.
The Market has Spoken
The semiconductor industry trades at an average price-to-earnings multiple of 31.4x today, sending Broadcom a discount of roughly 8% in its 28.8x valuation. More importantly, you must understand how Broadcom looks relative to NVIDIA and other worthy competitors like Advanced Micro Devices Inc. (NASDAQ: AMD).
NVIDIA trades at an elevated P/E ratio of 42x, giving Broadcom a 30% discount. Advanced Micro Devices shows a valuation of 58.5x to give you an even bigger discount of 51% in Broadcom stock. Here’s what this valuation gap caused.
Institutional money is starting to flow from places like the Vanguard Group, which upped its stake in Broadcom stock by as much as 1.7% in the past month, representing a multi-billion dollar purchase. Not only this, but Wall Street analysts also came trickling in.
Analysts at Barclays (NYSE: BCS) see the writing on the wall, which is why they are willing to go the extra mile to give you a higher valuation than the consensus price target of $180 set today. By shooting for a valuation of $235 a share, these analysts believe Broadcom stock could rise by as much as 16% from today.
When the market rallies, it brings most stocks along for a ride. Considering that most stocks in the semiconductor space have rallied hard in the past few months, bringing them to sky-high valuation metrics, Broadcom could set up to be the next one to expand its P/E.
