Advances in artificial intelligence (AI) have been in the spotlight since early last year, and many companies have stepped up to capture this fast-growing market. As a result, companies positioned to benefit from this technology have experienced a rise in their stock prices commensurate with this enormous opportunity. One company that is ready for this paradigm shift is Broadcom (NASDAQ:AVGO)which supplies many of the semiconductors and other products that are key components in the AI ​​infrastructure.
The company’s consistent performance has fueled its rising share price. Shares of Broadcom have risen 167% since the start of last year – marking the widespread use of generative AI. However, over the past decade, Broadcom’s revenue has increased 881%, driving net income up 843%. As a result, the stock has risen 1,980%, enriching shareholders along the way.
When the company announced 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 soared more than 900% in the ensuing years, which likely prompted management’s decision to split the stock. This revelation creates renewed interest in the semiconductor and network specialist.
Let’s take a step back to examine the stock split process and what it all means for investors.
The fine print of the stock split
Broadcom revealed that its board of directors had approved a 10-to-1 stock split. This will require an amendment to the company’s revised certificate of incorporation, which according to CFO Kirsten Spears, “will proportionately increase the authorized common shares.”
As a result of this split, shareholders of record will receive an additional nine shares of common stock for each share they own after the market close on Friday, July 12, effective Thursday, July 11. The shares will trade on a pre-split adjusted basis. when the market opens on Monday, July 15.
Broadcom shareholders do not need to take any other action to obtain the additional shares. Investment banks and brokers take care of the details, with the change being implemented behind the scenes. As a result, the newly minted shares will simply appear in investors’ accounts.
It’s important to note that the process may vary depending on the brokerage and account type, so the additional shares may not appear 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 appear.
Providing figures for comparison can help highlight the stock split process. Shares of Broadcom were trading around $1,500 when the market closed Wednesday; for every share now held, post-split shareholders will own ten shares worth approximately $150 each.
Is a stock split a good thing?
From the above illustration it is clear that the total share of ownership of each shareholder will not vary as a result of the stock split. In other words, it doesn’t matter whether you have one €20 bill or twenty €1 bills: the amount of cash you have is still the same. Likewise, Broadcom shareholders will only have a greater number of cheaper shares.
However, investor psychology does play a role, and the excitement caused by the split could ultimately drive the stock price higher. Experts also speculate that lowering the price will make the stock more attractive to ordinary investors. In its statement, management even said that the driver behind its decision was “to make ownership of Broadcom stock more accessible to investors and employees.”
While offering cheaper shares may initially increase demand, the excitement is usually short-lived. Over the longer term, investors are more interested in a company’s business and financial performance, the results of which will determine whether its stock price will rise or fall in the future.
Are Broadcom Stocks a Buy?
In itself, the stock split is not a compelling reason to buy 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 rose 43% year over year to $12.5 billion, up 4% quarter over quarter. This caused adjusted earnings per share (EPS) to rise 6% to $10.96.
For context, analyst consensus estimates were for revenue of $12.03 billion and earnings per share of $10.84, so Broadcom easily beat expectations.
Management was clear that strong demand for generative AI was behind the robust results, as sales of AI products reached a record $3.1 billion – 25% of the company’s total revenue.
There was also positive news for income investors. Broadcom has announced its quarterly dividend of $5.25 per share, which will be payable on June 28 to shareholders of record as of the market close on June 24. This gives sufficient time to process the dividend before the split takes place.
We are still in the early stages of AI adoption, which suggests there is more to come. The global AI market was valued at $2.4 trillion in 2023 and is expected to rise to $30.1 trillion by 2032, according to Expert Market Research. That would be a compound annual growth rate of 32%. As a supplier of a wide range of semiconductors and related AI paraphernalia, Broadcom is well positioned to benefit from this strong and growing secular tailwind.
Broadcom has gained a whopping 34% so far in 2024, leading to a commensurate increase in its valuation. The stock is currently selling for 32 times forward earnings; while that is a slight premium over the multiple of 28 for the S&P500, it’s hardly an apples-to-apples comparison. Broadcom shares are up 427% over the past five years, compared to just 88% for the S&P 500, illustrating why Broadcom deserves a premium valuation.
For these and other reasons, Broadcom stock is a buy.
Should You Invest $1,000 in Broadcom Now?
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Danny Vena has no positions 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
