When Broadcom (NASDAQ:AVGO) When the company reported its second-quarter fiscal 2024 results, which ended May 5, it delivered results that beat Wall Street expectations. More interesting for shareholders, however, was another development.
Along with the financial report, Broadcom’s management unveiled a 10-for-1 stock split. Since the June 12 announcement, shares have risen 6% (at the time of writing) and the stock is up 93% year-to-date. This illustrates continued investor interest, which is likely further fueled by the enormous opportunities presented by artificial intelligence (AI).
The stock split is scheduled for Friday, July 12, after the market closes. Does the upcoming stock split make Broadcom a once-in-a-generation investment opportunity? Let’s take a look at what the evidence reveals.
Summary of the stock split
A quick look at the purpose of a stock split can help provide context to this process. When a company has strong operational and financial performance over a sustained period of time, demand for stock ownership increases, which is reflected in a rising stock price. Unfortunately, this often makes the stock inaccessible to some casual investors.
To rectify the situation, management may initiate a stock split, causing the stock price to drop. The company noted in its report that the purpose of the split was “to make ownership of Broadcom stock more accessible to investors and employees.” The result is that ordinary investors will be better able to purchase full shares rather than resorting to buying fractional shares, which are available from a number of brokerage firms.
Once the stock split is completed, shareholders of record will receive nine additional shares of Broadcom stock for each share they own. At the same time, the price of each share will be reduced to 1/10th of the price, so that the total value of each shareholder’s investment will not change. The stock will be split after market close on Friday, July 12, and begin trading on a split-adjust basis on Monday, July 15. What should be more important for investors, however, is that the same factors that have driven Broadcom stock higher in recent years will still be at work.
Are Broadcom Stock a Buy?
Beyond the stock split process, the essential investment question remains: Is Broadcom stock a buy ahead of the much-discussed stock split? Let’s take a look at the company’s recent results.
In the second quarter, Broadcom reported revenue of $12.5 billion, up 43% year over year and 4% sequentially. This boosted adjusted earnings per share (EPS) of $10.96 by 6%. Management said robust demand for generative AI drove the results, noting that sales of AI-related products rose to a record $3.1 billion and now account for 25% of the company’s total revenue.
Management suggested the trend is likely to continue. Broadcom raised its full-year guidance to $51 billion, which would represent year-over-year growth of 42%.
The company is also developing a consistent track record of dividend payments. Broadcom is now in its fourteenth consecutive year of rising payouts. From its humble beginnings in mid-2013, the company has increased its payout from $0.21 to $5.25 per quarter, an increase of 2,400%. Wall Street expects Broadcom to earn $47.49 per share in 2024. That equates to a payout ratio of 44% of this year’s expected earnings, based on the current quarterly dividend, so there is plenty of room to increase the payout.
A unique investment opportunity?
Most experts agree that the accelerated adoption of AI is just beginning, and demand will only grow from here. Because generative AI automates many time-consuming and mundane tasks, it increases productivity, leading to higher profits.
While estimates vary considerably, the impact of generative AI on the economy is expected to be between $2.6 trillion and $4.4 trillion over the next decade, according to research compiled by McKinsey & Company, which is a once-in-a-generation a-generation opportunity represents. However, it’s worth noting that estimates have increased over time, so the actual impact may be higher as new applications for AI are created. Broadcom’s extensive reach in technology circles gives the company the potential to grab an ever-larger piece of the AI ​​pie.
Over the past five years, Broadcom has been on fire, with revenue growth of 126%, boosting net profit by 197%. This in turn has driven the share price up 463% over the same period (at the time of writing), more than five times the returns of the S&P500Furthermore, the stock is up 93% in the past year alone as its pivotal position in the AI ​​ecosystem boosts results.
Broadcom currently trades for 33 times forward earnings, which is a premium compared to a multiple of 28 for the S&P 500. However, given its significant outperformance over the past five years, it’s clear that Broadcom deserves a premium.
Given the company’s strong track record of results, ubiquitous reach and prevailing secular tailwinds, I would argue that the evidence supports the case that Broadcom is a once-in-a-generation investment opportunity ahead of the 10 -for-1 stock split. That said, I don’t think it matters whether you buy Broadcom before or after the stock split — as long as you buy it.
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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.
Is Broadcom Stock a One-Time Investment Opportunity Ahead of the July 12 10-for-1 Stock Split? was originally published by The Motley Fool
