The rise of artificial intelligence (AI) has been a boon for tech companies and those investing in them in recent times. Players developing tools or equipment to power AI projects have risen the most, often in the triple or quadruple digits over a period of a few years. That’s because AI customers have flocked to these companies, boosting their revenues as well.
Broadcom (NASDAQ:AVGO) is one of these AI stars. The semiconductor and infrastructure software company saw profits rise as AI development accelerated, and that momentum has continued. In the most recent quarter, sales rose by double digits, and the company forecast annual revenue of $51 billion – up 42% from last year.
Broadcom’s shares reflect this success: They are up almost 500% in five years, and late last year they surpassed $1,000 and continued to rise. But the price per share won’t be that high for much longer. After the move of a fellow AI giant NvidiaBroadcom this week announced a 10-for-1 stock split, scheduled for next month.
Is now a good time to buy the shares? Let’s find out.
How the Broadcom stock split will unfold
First, a word about stock splits in general and how the Broadcom operation will unfold. Stock splits reduce the price of each individual share by issuing more shares to current holders. But these operations do not change the market value of the company or the value of your holding company. So they don’t change anything fundamental, and are instead more of a mechanical operation.
Companies typically launch these operations after they have done well and their stock price has risen significantly – and this move is intended to make their shares more accessible to a wider range of investors. Broadcom even cited this as a reason for its decision, saying the split will help employees and investors buy the shares more easily.
As mentioned, Broadcom is launching a 10-for-1 split, which means if you own one share as of the market close on July 11, you’ll get nine additional shares after the market close on July 12. The stock will trade on a split basis when the market opens on July 15. Using the current price of $1,678 as a guide, the new price after the market opens would be around $167.
Investors welcomed the announcement of Broadcom’s stock split, sending its shares up 12% in one trading session. The market generally likes stock splits for two reasons: they suggest a company has confidence in its future, and as mentioned, these operations make it easier for more people to invest in the stock.
Is Broadcom a bargain now?
Now let’s get back to our question: After this news, is it time to buy Broadcom stock? Since stock splits are mechanical moves and not a catalyst for stock performance, you shouldn’t buy Broadcom just because it’s planning a stock split.
But here’s why you should consider buying shares of the company. Broadcom has been one of the winners of the AI boom so far, and there are reasons to believe it will continue to be so. The company makes thousands of products that are used everywhere, from data centers to your smartphone: more than 99% of Internet traffic flows through a Broadcom product or service.
Broadcom has a solid earnings track record, with revenue and profits increasing over the past decade.
And today, Broadcom’s acquisition of VMware, a cloud software company, and the demand for AI are significantly contributing to the growth. Including VMware’s contribution, revenue rose 43% to $12.5 billion in the most recent quarter.
And excluding WMware, revenue rose 12% thanks to demand for AI. AI customers flocked to Broadcom for AI networking and custom accelerators, and AI revenues rose 280% year over year to $3.1 billion. Currently, seven of the eight largest AI clusters in existence use Broadcom Ethernet systems, and Broadcom predicts that by next year all large-scale projects will be on Ethernet.
It’s also important to remember that we’re still in the early days of the AI growth story, with analysts predicting an AI market of over $1 trillion by 2030. A leader like Broadcom will clearly benefit if demand continues, and that is why the stock looks like this. very reasonably priced with a forward earnings outlook of 34x.
All this means you don’t have to wait for the stock split to get in on this exciting long-term AI growth story: Broadcom is making a fantastic buy right now.
Should You Invest $1,000 in Broadcom Now?
Consider the following before buying shares in Broadcom:
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Adria Cimino has no positions in the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Broadcom just announced a stock split. Time to buy? was originally published by The Motley Fool
