Selling Broadcom shares at a discount to Nvidia

Everyone in the market is excited about the new breakouts in the technology stocks sector, with a particular focus on names like NVIDIA NASDAQ:NVDA, called the king of the pack. After surpassing all-time high prices as if there were no barrier, expanding financials and increasing demand from artificial intelligence capabilities, the company’s offerings have helped the stock surpass all its highs.

However, when a stock becomes too crowded with an audience that is not necessarily in the name of the long-term potential offered by the company, future behavior can quickly become speculative and volatile. This is why looking at 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 shortly, you’ll find out why the largest institutions are looking to buy Broadcom Inc. NASDAQ: AVGO as a cheaper alternative to gain the same, if not more, advantage left to the leader of the pack, NVIDIA. Before we dive deeper, here’s why Broadcom is only a small slice of the industry rally pie.

Stand out from the crowd

By 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 created equal. After declining as much as 15% in the last month, The Apple company. NASDAQ:AAPL it is on the losing end of the industry; meanwhile Broadcom grew by 22%. The market tells you that Broadcom is better positioned for what’s next for the industry.

As Broadcom enables some of the infrastructure software that the United States — and other nations — need to build their Internet and communications capabilities, some of Wall Street’s biggest players are looking to get more exposure to the name.

One reason for this newfound interest is the growing adoption of a work-from-home model or, as it is more commonly applied today, a hybrid environment. People need to ensure their WiFi infrastructure is up to scratch to get their work done and allow bandwidth for other activities like streaming and entertainment.

Of course, these trends are difficult to quantify, but the market’s handling of the numbers is simple. As it trades at 94% of its 52-week high price, Broadcom stock has shown more than bullish momentum in recent months, with plenty more behind this behavior to push it higher.

You can look away from the hype surrounding NVIDIA today and find a similar benefit at a much lower price. Here’s how Broadcom becomes a much better deal to continue to sustain the spillover effect of NVIDIA’s massive run.

The market has spoken

Today the semiconductor industry trades at an average P/E multiple of 31.4x, sending Broadcom about an 8% discount to its 28.8x valuation. More importantly, you need to understand how Broadcom looks compared to NVIDIA and other worthy competitors Advanced Micro Devices Inc. NASDAQ:AMD.

NVIDIA trades at a high 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% on Broadcom stock. Here’s what caused this rating gap.

Institutional money is starting to flow from places like Vanguard Group, which increased its stake in Broadcom shares as much as 1.7% over the past month, representing a multibillion-dollar purchase. Not only that, but Wall Street analysts also intervened.

Analysts at Barclays New York Stock Exchange: BCS you 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 $180 consensus price target set today. Targeting a valuation of $235 per share, these analysts believe Broadcom shares could rise as much as 16% from today.

When the market recovers, it takes most of the stocks with it. Considering that most stocks in the semiconductor industry have rallied strongly in recent months, sending them to sky-high valuation metrics, Broadcom could be preparing to be the next to expand its P/E.

Before you consider NVIDIA, you’ll want to hear this.

MarketBeat tracks daily Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and NVIDIA wasn’t on the list.

While NVIDIA currently has a “Moderate Buy” rating among analysts, top-rated analysts believe these five stocks are better buys.

View the five stocks here