Advances in artificial intelligence (AI) have captured the spotlight since early last year, and many businesses have pivoted to capture this burgeoning market. As a result, companies positioned to profit from this technology have experienced a run-up in their stock prices commensurate with this vast opportunity. One company poised for this paradigm shift is Broadcom (NASDAQ: AVGO), which provides many of the semiconductors and other products that are key components in AI infrastructure.
The company’s consistent performance has fueled its rising share price. Broadcom stock has gained 167% since the start of last year — which marked the widespread use of generative AI. However, over the past decade, Broadcom’s revenue has jumped 881%, pushing its net income up 843%. As a result, the stock has soared 1,980%, enriching shareholders along the way.
When the company released its second-quarter results on Wednesday, investors were in for a surprise: Management announced its first stock split since merging with Avago Technologies in 2016. The stock has surged by more than 900% in the ensuing years, which likely spurred management’s decision to split the shares. This revelation is bringing renewed interest to the semiconductor and networking specialist.
Let’s take a step back to examine the stock-split process and what it all means for investors.
The stock-split fine print
Broadcom revealed that its board of directors had approved a 10-for-1 forward stock split. This will require an amendment to the company’s Restated Certificate of Incorporation, which CFO Kirsten Spears says “will proportionately increase the authorized shares of common stock.”
As a result of this split, shareholders of record as of Thursday, July 11, will receive nine additional shares of common stock for each share owned after the market close on Friday, July 12. The stock will begin trading on a split-adjusted basis when the market opens on Monday, July 15.
Broadcom shareholders don’t have to take any other action in order to obtain the additional shares. Investment banks and brokerages take care of the details, with the change effected behind the scenes. As a result, the newly minted shares of stock will just show up in investors’ accounts.
It’s important to note that the process can vary depending on the brokerage and type of account, so the additional shares may not make an appearance immediately when the market opens on July 15. The process involves people and computers and can take hours or even days, so investors should be patient until the additional shares show up.
Providing numbers for the equation can help bring the stock-split process into focus. Broadcom stock was trading near $1,500 when the market closed on Wednesday; for each share held now, shareholders after the split will own 10 shares worth around $150 each.
Is a stock split a good thing?
It’s clear from the illustration above that the total portion of each shareholder’s ownership won’t vary as a result of the stock split. Put another way, it doesn’t matter if you have one $20 bill or 20 $1 bills — the amount of cash you have is still the same. Similarly, Broadcom stockholders will merely have a higher number of lower-priced shares.
However, investor psychology does come into play, and the excitement sparked by the split could ultimately drive up the stock price. Experts also speculate that lowering the price will make the stock more palatable for everyday investors. In fact, in its statement, management said the impetus behind its decision was “to make ownership of Broadcom stock more accessible to investors and employees.”
While offering lower-priced shares can initially drive up demand, the excitement is typically short-lived. Over the longer term, investors are more interested in a company’s business and financial performance, the results of which will determine if the stock price will rise or fall in the future.
Is Broadcom stock a buy?
In and of itself, the stock split isn’t a compelling reason to buy shares of Broadcom stock. That said, the company’s positioning in the AI ecosystem and Broadcom’s accelerating results provide evidence that the stock is a buy.
In the second quarter, Broadcom reported revenue that jumped 43% year over year to $12.5 billion, marking a 4% quarter-over-quarter increase. This drove adjusted earnings per share (EPS) up 6% to $10.96.
For context, analysts’ consensus estimates were calling for revenue of $12.03 billion and EPS of $10.84, so Broadcom sailed past expectations with ease.
Management was clear that strong demand for generative AI was behind the robust results, as sales of AI products hit a record $3.1 billion — 25% of the company’s total revenue.
There was positive news for income investors as well. Broadcom announced its quarterly dividend of $5.25 per share, which will be payable on June 28 to stockholders of record as of market close on June 24. This allows plenty of time for the dividend to process before the split takes place.
We’re still in the early stages of AI adoption, which suggests there’s more to come. The worldwide AI market was estimated at $2.4 trillion in 2023 and is expected to climb to $30.1 trillion by 2032, according to Expert Market Research. That would be a compound annual growth rate of 32%. As the supplier of a vast array of semiconductors and related AI paraphernalia, Broadcom is well positioned to benefit from this strong and growing secular tailwind.
Broadcom has gained an impressive 34% thus far in 2024, which has fueled a commensurate increase in its valuation. The stock is currently selling for 32 times forward earnings; while that’s a slight premium to the multiple of 28 for the S&P 500, it’s hardly an apples-to-apples comparison. Broadcom stock has gained 427% over the past five years, compared to just 88% for the S&P 500, which illustrates why Broadcom deserves a premium valuation.
For those reasons and more, Broadcom stock is a buy.
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Danny Vena has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Broadcom Announces a 10-for-1 Stock Split. Here’s What Investors Need to Know. was originally published by The Motley Fool
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