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Forget the stock split – these are the four reasons to buy Broadcom stock now

Broadcom (NASDAQ:AVGO) recently announced a 10-for-1 stock split, which will take effect after the market closes on July 12. That upcoming split will drop the trading price from about $1,700 (at the time of writing) to $170. A split involves dividing just one share into smaller pieces, so Broadcom’s underlying valuations will remain the same.

It also won’t make the shares more affordable, as most brokers already allow investors to buy fractional shares. However, the split will make Broadcom’s options cheaper to trade, since a single contract is tied to 100 underlying shares, and it will make it easier for the company to pay out its stock-based compensation in smaller increments.

A digital illustration of a semiconductor.

Image source: Getty Images.

So unless you’re an options trader or a Broadcom employee, you shouldn’t think of the stock split as a big deal. Instead, you should focus on the four reasons why the stock is still an attractive investment, even though it’s hovering near its all-time high.

1. Broadcom’s expansion strategy is bold

Broadcom has continuously expanded over the past eight years. Singapore’s Avago Technologies acquired the original Broadcom for $37 billion in 2016, inherited the brand and moved its headquarters to the US in 2018.

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It also expanded into the infrastructure software market by acquiring CA Technologies for $19 billion in 2018, Symantec’s enterprise security division for $11 billion in 2019, and cloud software giant VMware for $69 billion by the end of 2023.

That bold expansion made it one of the largest chipmakers and infrastructure software providers in the world. In the last quarter, it generated 58% of its revenue from semiconductors and the remaining 42% from software.

In the long term, the company expects to generate about half of its revenue from software, reducing its dependence on the cyclical semiconductor sector and its core customer. Applewhich has accounted for a fifth of turnover in the past two financial years.

Simply put, Broadcom isn’t a dusty, old tech company running out of room to grow. It will likely continue to expand through major acquisitions to diversify its business and broaden its position against smaller chip and software companies.

2. Sales of Broadcom’s AI chips are soaring

Broadcom’s semiconductor division sells a wide range of wireless, optical and data storage chips. But in the second quarter of fiscal 2024 (which ended in May), sales of AI-related optical and networking chips rose 280% year over year to $3.1 billion, accounting for 25% of sales.

That explosive growth, driven by the market’s insatiable appetite for generative AI applications, offset weakness in the enterprise and telecom markets in a challenging macro environment.

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Seven of the eight largest hyperscale AI clusters in use currently use Broadcom’s chips, so it’s a good way to benefit from the long-term growth of the AI ​​market without putting too many eggs in the same basket. lay.

3. Broadcom’s growth is consistent

From fiscal 2016 to fiscal 2023 (which ended last October), Broadcom’s adjusted revenues experienced a compound annual growth rate (CAGR) of 15%, adjusted gross margin increased from 60.5% to 74.7%, and adjusted earnings per share with a CAGR of 21%. That robust growth tells us that Broadcom has not deteriorated its business with its major acquisitions.

For fiscal 2024, analysts expect revenue and adjusted earnings per share to rise 44% and 12%, respectively, as it marks the first full year of VMware’s revenue. For fiscal 2025, they expect revenue and adjusted earnings per share to grow by 16% and 26%, respectively, assuming the company makes no more major acquisitions.

4. The shares are still fairly valued

Broadcom’s shares trade at 37 times this year’s earnings and 29 times next year’s earnings. Those valuations aren’t cheap, but they are reasonable for a stock that has almost doubled in the past twelve months. It also pays a forward yield of 1.2%.

Some investors might argue this Nvidia, which is growing a lot faster and trades at 50 times forward earnings, is a better AI play. However, I think Broadcom is still a more balanced and diversified play in the AI, semiconductor and infrastructure markets – and is still not too expensive relative to its long-term growth potential.

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When should you buy Broadcom?

It doesn’t matter whether you buy Broadcom before or after the upcoming split. It could see some more volatile trading days around that date, but that short-term noise is ultimately meaningless for long-term investors. Instead, they should focus on its key strengths to understand why it could reach new highs in the coming years.

Should You Invest $1,000 in Broadcom Now?

Consider the following before buying shares in Broadcom:

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Leo Sun has positions at Apple. The Motley Fool holds positions in and recommends Apple and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

Forget the stock split—these are the four reasons to buy Broadcom stock now was originally published by The Motley Fool

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