Better AI Stocks: Lumen Technologies vs. Broadcom

Lumen Technologies (LIGHT 93.05%) AND Broadcom (AVGO 1.29%) both have been lifted by the buying frenzy for artificial intelligence (AI) stocks. Lumen shares are up more than 70% over the past 12 months, while Broadcom shares are up more than 60%.

Lumen, the telecommunications company formerly known as CenturyLink, impressed bulls by signing a new AI infrastructure deal with Microsoft and a contract for the supply of fibers Cornwall. Broadcom has dazzled the market with a surge in sales of its AI-focused networking chips. So which of these soaring AI stocks is a better buy right now?

Lumen’s Unexpected Transformation into an AI Game

Lumen is one of the largest wireline service providers in the US. But instead of expanding into the wireless market like AT&T AND Verizon CommunicationsLumen has doubled down on the slow-growing fixed-line market through a series of mergers and acquisitions.

Lumen aimed to generate slow but steady growth from this aging market as economies of scale kicked in. The company also added additional cloud, security and collaboration services to its wireline business plans, and expanded its faster fiber networks.

Lumen’s smaller fiber business grew, but that growth couldn’t offset a secular decline in its wireline division. In 2022, revenue fell 11% to $17.5 billion, and the company suffered a net loss of $1.5 billion.

In 2023, revenue fell 17% to $14.6 billion, and net loss widened to a staggering $10.2 billion. These large losses caused Lumen to suspend its dividend in November 2022, and the stock fell below $1 in June.

But since then, Lumen’s stock has more than tripled. A key catalyst was a partnership with Microsoft Azure, the world’s second-largest cloud platform. The deal will see Lumen upgrade Azure’s cloud and AI infrastructure with new networking and fiber equipment. Another catalyst was a deal with Corning that gave the company a steady supply of fiber.

Lumen still carried $18.5 billion in long-term debt with $1.6 billion in cash and equivalents on its balance sheet at the end of the first quarter of 2024. Its deal with Microsoft could ease some of that pressure, stabilize its near-term growth and help it narrow its net losses. However, analysts still expect its revenue to decline 11% to $13 billion in 2024 as it narrows its net loss to $121 million. With an enterprise value of $21 billion, Lumen may seem cheap at 1.6 times this year’s sales — but it faces a number of unforeseen challenges and is expected to remain unprofitable for the foreseeable future.

Broadcom’s AI chips are becoming a key growth driver

Broadcom has expanded its business over the past decade by acquiring other chipmakers and infrastructure companies. In the latest quarter, 58% of revenue came from its semiconductor business, which sells a wide range of wireless, optical and storage chips, while the remaining 42% came from infrastructure software.

Broadcom relied on Apple for 20% of sales in fiscal years 2022 and 2023 (which ended last October), but its acquisition of cloud software giant VMware last November should significantly reduce customer concentration.

In fiscal 2022, the company’s revenue rose 21% to $33.2 billion, and adjusted earnings per share rose 34%. In fiscal 2023, the company’s revenue rose 8% to $35.8 billion, and adjusted earnings per share rose another 12%. The company’s growth slowed as the 5G upgrade cycle ended and macro headwinds forced some IT infrastructure companies to trim spending.

However, in fiscal 2024, analysts expect Broadcom’s revenue and adjusted earnings per share to grow 44% and 13%, respectively, as it integrates VMware and sells more networking and optical chips for the AI-focused data center market. The company is expected to sell at least $11 billion worth of AI chips in fiscal 2024, which would account for more than a fifth of its projected revenue for the full year.

For fiscal 2025, analysts expect revenue and adjusted earnings per share to rise 17% and 27%, respectively, as the company edges out its acquisition of VMware. Those are solid growth rates for a stock that trades at 24 times forward earnings and pays a respectable forecast dividend yield of 1.5%. The company ended the last quarter with $9.8 billion in cash and equivalents, but it also amassed $71.6 billion in long-term debt from a series of big acquisitions in the chip and software sectors.

The clear winner: Broadcom

Lumen’s deal with Microsoft has given its business a boost, but it’s not out of the woods yet. I’ll need to see a few quarters of real progress before I consider this deal a game-changer for its struggling wireline division.

Broadcom, meanwhile, continues to fire up steam as it expands its business. So for now, it still makes more sense to stick with the higher-growth chip and software leader than risk a telecom outsider turning around.

Leo Sun has positions in AT&T and Apple. The Motley Fool has positions in and recommends Apple and Microsoft. The Motley Fool recommends Broadcom, Corning, and Verizon Communications and recommends the following options: long January 2026 $395 call options on Microsoft and short January 2026 $405 call options on Microsoft. The Motley Fool has a disclosure policy.