Shares of Broadcom (NASDAQ:AVGO) have risen impressively over the past year with gains of 96%, and the good thing is that this semiconductor giant seems all set to continue its solid momentum following the release of its fiscal second quarter results in mid-June 2024 (for the three months ending May 5).
Not only have the chip giant’s revenues and profits surged past consensus estimates, but management has also announced a 10-for-1 stock split that will take effect on July 15. This makes Broadcom the latest company to join the stock split club. and it was not surprising that management took this step.
After all, Broadcom’s stellar rally over the past year, fueled by growing demand for its artificial intelligence (AI) chips, has pushed its stock price above $1,700. CFO Kirsten Spears said the stock split is being done to “make ownership of Broadcom stock more accessible to investors and employees.”
Now, a stock split is a cosmetic move because it simply lowers a company’s stock price by increasing the number of shares outstanding. It has no impact whatsoever on the company’s fundamentals or market capitalization. Still, investors are cheering the results and the stock split, sending the stock up 12% after the announcement.
But if you’re one of those who missed Broadcom’s rally and want to add a top semiconductor stock to your portfolio, should you buy it after the latest announcements?
AI gives Broadcom a nice boost
Broadcom’s quarterly revenue rose 43% year over year to $12.5 billion, beating the consensus estimate of $12.06 billion. The chipmaker’s adjusted profit of $10.96 per share also beat Wall Street expectations of $10.85 per share.
Excluding the VMware acquisition that closed in November 2023, Broadcom’s revenue increased 12% year-over-year on an organic basis. Better yet, the company has raised its full-year guidance and now expects to end the fiscal year with $51 billion in revenue, up from its previous forecast of $50 billion. The updated guidance beats analysts’ estimate of $50.6 billion.
Growing demand for Broadcom’s AI chips is a key reason why the company has raised its full-year guidance. More specifically, Broadcom’s revenue from sales of AI chips rose a whopping 280% year over year to $3.1 billion. The company now expects AI revenue to reach $11 billion in fiscal 2024, up from its previous estimate of $10 billion, which is exactly the figure by which Broadcom raised its full-year guidance.
It’s worth noting that AI is boosting Broadcom’s business in a number of ways. First, demand for the company’s Ethernet network switches has significantly improved to enable high-speed data transfer in AI data centers. Second, Broadcom’s hyperscale customers have increased the deployment of their custom AI chips in data centers, and the good thing is that the company appears to be getting more revenue from them.
Broadcom CEO Hock Tan noted during the company’s latest earnings conference call that the company “just got the next generation of custom AI accelerators for these hyperscale customers of ours.” As a result, it won’t be surprising to see the chipmaker’s AI revenue growth accelerate in the current fiscal year and beyond.
That’s because the Ethernet switch market is growing at an impressive pace, with a 20% increase by 2023 thanks to AI. The global AI data center switches market is expected to grow 38% year-on-year through 2029 and generate $20 billion in annual revenue by the end of the forecast period. Meanwhile, the demand for custom AI accelerators is also rapidly increasing.
Broadcom thus has a sustainable growth opportunity through AI, which would allow it to maintain a healthy growth rate in the long term.
Is the stock a buy now?
While the stock split will lower the price of each Broadcom share and make it more accessible to smaller investors, it would be worth looking at the company’s valuation before investors decide to put their money into the stock.
Broadcom currently has a price-to-earnings ratio of 64. That’s expensive compared to the Nasdaq-100 index’s earnings multiple of 31 (using the index as a benchmark for technology stocks). However, the price-earnings ratio of 31 indicates a nice increase in operating results and shows that the share is not expensive in the long term.
Broadcom remains one of the top AI stocks to buy right now following its latest quarterly report, thanks to the company’s growing AI business and the fact that the stock split announcement could give its stock a nice boost even though that will not be the case. will change Broadcom’s already solid prospects.
Should You Invest $1,000 in Broadcom Now?
Consider the following before buying shares in Broadcom:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Broadcom wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $808,105!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns June 10, 2024
Harsh Chauhan 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. Time to buy? was originally published by The Motley Fool
