AVGO has strong fundamentals and ~48% upside vs fair value, but is a close call vs TSM; speaker might pick TSM over AVGO if buying now.

Broadcom and Taiwan Semiconductor Manufacturing Company are seeing sales and profits boom as a result of the increasing demand for artificial intelligence. But which one of these two semiconductor companies is the better stock to buy right now?

Broadcom too experienced a significant increase in its sales to $75 billion. That's up from around $38 billion in 20 23. Of course, that also includes the impacts of the VMware acquisition. looking back longer term, these companies have seen their sales proliferate since 2017 where Broadcom generated roughly $10 billion in sales at that point, those sales have increased by more than 7x.

Broadcom, meanwhile, keeps signing new deals. Although they are potentially losing some contracts to competition, still they are signing significant amounts of new deals and their backlog has increased to several tens of billions of dollars.

Perhaps more impressively, while these companies have seen their revenues proliferate, their profit margins expanded. And that's an indication that demand for their products and services are robust and organic.

It's not a result of discounts or promotions or incentives that's causing the sales increase. It's a result of organic demand proliferating.

Broadcom, meanwhile, has seen its profit margins soar from around 4% in 2017 to 44% in the most recent trailing 12-month period.

Meanwhile, Broadcom has informed investors that as it matures in developing the synergies from the VMware acquisition, its operating profit margins should improve. However, more of Broadcom's sales are shifting towards its semiconductor technology and away from its software, and that has the opposite impact of decreasing its profitability because its software segment generates significantly more profit margins than its semiconductor segment.

Regardless, these companies have excellent profitability and profit margins, which are expected to remain very, very strong even though on the margin they might move lower, overall they're still expected to remain very, very strong.

Broadcom is more of an asset-light business model. It outsources most of the manufacturing of its components, and so it generates lower capital investment, but it also generates a lower return on invested capital at 20% compared to 34% for TSM.

Importantly, these ROIC ratios for each of them is greater than their weighted average cost of capital, which in simple terms means that every dollar the management team is reinvesting into the company is adding shareholder value.

Speaking of value and valuation, these two are trading at very similar valuations. When I measure them on a forward price to earnings basis, ... and Broadcom is trading at 18.95.

Zooming out and comparing their valuations against the average stock in the S&P 500 or the average stock in the markets worldwide and comparing it against their own performance, these are attractive valuations for businesses that are growing revenue above double digits with profit margins operating above 50% returns on invested capital above the weighted average cost of capital in an industry that's booming with strong competitive advantages these are favorable valuations for both.

And again, very similarly, I calculated an upside of 48% for Broadcom comparing the fair value estimate I calculated at $547 and the current market price of $370.

So, when I said this is very close, I wasn't kidding. When measuring on a forward price-to-earnings basis, they're trading at very similar valuations. When measuring on the discounted cash flow valuation models, they're selling at very similar discounts to fair value.

Very, very close and in fact, this makes my decision very difficult. It's a close call. It's not an easy decision which one of these two is the better stock to buy.

That's even though I own Broadcom stock, right? Earlier this year, I bought Broadcom stock, but the situation was different earlier this year when I made that purchase. If I had to do it all over again, I might pick Taiwan Semiconductor instead of Broadcom.