Here are 5 things smart investors need to know about Broadcom’s upcoming 10-for-1 stock split

The stock market is off to a torrid start in 2024. About halfway through the year the S&P500 has gained about 15% while technology was tough Nasdaq Composite is up almost 18%.

One of the hottest sectors driving the market to new heights is technology – mainly driven by euphoria around all things artificial intelligence (AI). As stock prices continue to rise, some companies have resorted to stock splits in an attempt to open up shares to a broader investor base.

Semiconductor company Broadcom (NASDAQ:AVGO) is the latest chip company to announce a stock split, joining its peers Nvidia And Lam Research.

Let’s dive into some important details regarding stock splits, and assess whether Broadcom could be a lucrative opportunity for long-term investors.

1. What are stock splits and how do they work?

A stock split is a financial instrument in which a company’s share price and number of shares change by the factor in the split ratio.

In early June, Broadcom announced it will complete a 10-for-1 stock split. This means that after the split, Broadcom’s outstanding shares will increase by a factor of 10, while the share price will divide by 10.

Let’s look at an example. In the table below, you can see Broadcom’s current share count, stock price, and market cap, both before and after the split.

Data source: Broadcom SEC filings and Yahoo! Finances.

If the split were to occur today, Broadcom’s outstanding shares would rise from approximately 465 million to 4.6 billion. At the same time, the company’s share price would be reduced by a factor of 10 – from $1,698 to $169. Given these dynamics, investors may see that a stock split does not change a company’s market capitalization.

2. Why would Broadcom split its stock?

AI has been one of the biggest pillars in the capital markets over the past eighteen months. Chip stocks in particular have benefited enormously from the hype surrounding AI.

Since January 2023, Broadcom shares are up 204%. As of this writing, Broadcom stock is hovering around $1,700 – close to its 52-week high of $1,851.

With the stock trading near record levels and a four-figure price tag, many investors likely view Broadcom as expensive. However, this way of thinking is not entirely correct and can lead to private investors missing out on good opportunities.

What I mean by this is that investors should not base their decision to buy a stock purely on its price. Close analysis of valuation multiples and benchmarking the company against a number of peers are necessary to determine whether a stock may be overvalued or undervalued.

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3. How are stock splits handled?

The nice thing about stock splits is that they are handled quite seamlessly. If you currently own shares of Broadcom, your investment broker will handle all the trading in the background.

For example, let’s say you currently own 10 shares of Broadcom at an average price of $1,500. Provided you don’t buy or sell additional shares before the split, your account will automatically display 100 shares at an average price of $150 once the split is completed.

4. Has Broadcom ever split its stock?

Broadcom originally went public in 1998 and traded under the ticker symbol BRCM on the Nasdaq stock exchange. During its time trading under the ticker BRCM, Broadcom completed three stock splits.

However, in 2016, Avago Technologies acquired Broadcom for $37 billion. As part of the transaction Avago Technologies changed its name to Broadcom Inc. The BRCM ticker symbol was retired and Broadcom now trades on the Nasdaq under the symbol AVGO.

Since trading under the new ticker as part of Avago Technologies has not split its shares as of 2016.

5. Are Broadcom Stocks a Buy Right Now?

Valuing semiconductor stocks can be a difficult task. The chip world is highly cyclical, and right now companies across the board are witnessing excessive demand due to the AI ​​revolution.

Given the nature of the chip industry, metrics like revenue and cash flow can quickly go south. For this reason, using the price-to-earnings ratio (P/E) or the price-to-free cash flow ratio (P/FCF) is not very useful, as each can be inconsistent over time.

Using the analysis in the chart above, investors can see that Broadcom’s price-to-sales ratio (P/S) of 17.9 is right in the middle of this comparable range. That said, Nvidia and Arm positions are clear outliers in this group. Taking those two out of the equation, Broadcom would be at a premium compared to most of its peers in the chip realm.

Despite the pricey valuation, I would advise against waiting until after the split to pick up shares. As explained above, the lower price tag on Broadcom stock after the split doesn’t mean it’s actually cheaper.

Furthermore, stock splits generally attract a lot of attention. Stocks that experience a stock split can experience quite a bit of volatility and momentum around the time of the split, driving the stock price higher after the split. If this happens, it technically means you’re buying Broadcom stock at a higher valuation than it was before the split.

To me, investing in Broadcom must be rooted in a long-term belief around AI and the company’s ability to emerge as a leader. If you’re looking to hedge other chip stocks in your portfolio or gain exposure to the long-term AI tailwinds, Broadcom could be a good option right now.

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Adam Spatacco has positions at Nvidia. The Motley Fool holds positions in and recommends ASML, Advanced Micro Devices, Lam Research, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

Here are 5 things smart investors need to know about Broadcom’s upcoming 10-for-1 stock split. Originally published by The Motley Fool