Broadcom‘S (NASDAQ: AVGO) share price almost doubled last year. Shares are up more than 45% so far in 2024. That’s great news for shareholders. For some investors, however, this huge success has driven Broadcom’s stock price so high (over $1,600) that they have been hesitant to buy.
That won’t be a problem for a while. In its first quarter update a few weeks ago, Broadcom announced plans for a 10-for-1 stock split after the market close on July 12, 2024. Shares of the semiconductor and software maker will trade at a pre-split price starting July 15 are traded on an adjusted basis. , 2024.
Broadcom CFO Kirsten Spears said the goal of this stock split is to “make ownership of Broadcom stock more accessible to investors and employees.” Some believe this increased accessibility could be a nice catalyst for already high-flying stocks. Should you buy Broadcom stock en masse before the 10-for-1 stock split?
The case for Broadcom
Historically, stocks have risen 25% in the 12 months following the announcement of a stock split bank of america Research Investment Committee. Broadcom shares are up just 8% since the stock split announcement, so it may have plenty of room to rise if history is any guide.
Are there reasons to buy Broadcom stock other than a possible stock split increase? Absolute. I would put the company’s acquisition of VMware at the top of the list. This deal significantly contributed to Broadcom’s revenue increasing 43% year over year in the second quarter of 2024. Earlier this year, Broadcom CEO Hock Tan said the company expects VMWare’s revenue growth to accelerate through the remainder of fiscal 2024.
The biggest reason to buy Broadcom stock, however, is the potential for artificial intelligence (AI). Seven of the eight largest AI clusters in the world use Broadcom’s Ethernet technology. Broadcom expects its network revenues to rise 40% this year, mainly due to demand for AI.
The company’s AI accelerator business is highly profitable. Creating networks to connect AI accelerators is complicated. But Broadcom is probably the best at it. As Tan said in the Q2 earnings call, the company has “the deepest and broadest understanding of what it takes to scale complex large workloads in an AI fabric.”
Broadcom is also a free cash flow (FCF) machine. In Q2, the company generated $4.4 billion in FCF — 36% of total revenue. Excluding the cash Broadcom used for restructuring and integration, FCF rose 18% year over year to $5.3 billion, accounting for 42% of revenue.
The case against Broadcom
Despite the excitement over Broadcom’s stock split, it won’t change the company’s underlying business. Also, investors who wanted to buy the shares but were leery of the high share price could have done so with fractional shares.
Broadcom’s growth story wouldn’t be nearly as impressive without the VMWare deal. Excluding VMWare, revenue grew just 12% year-over-year in Q2. The company can’t rely on the acquisition to boost its year-over-year results beyond Q4, as the transaction is set to close on November 22, 2023.
Some parts of Broadcom’s business remain weak. Wireless revenue rose just 2% year over year in the second quarter. Server storage connectivity revenue fell 27%. Broadband revenue fell 39%.
Just five customers generate approximately 40% of total revenue. Apple alone 17% of Broadcom’s total revenue. This dependence on a small number of customers poses a significant risk to Broadcom.
The company’s AI opportunity is big. However, Nvidia could become a strong competitor for Broadcom in Ethernet switching and custom AI accelerators.
There is also a potential concern about valuation. Broadcom shares trade at nearly 34 times forward earnings and 16.7 times trailing 12-month sales.
Buy before the split?
I don’t think investors should rush to buy Broadcom stock before the stock splits. My guess is that the split will be largely a non-event and not a major catalyst.
That said, Broadcom could remain a winner in the long run. Patient investors can buy now, wait for the stock split, or wait for a pullback and buy on the dip. If you plan to own Broadcom for a decade or more, the exact timing of your purchase probably doesn’t matter.
Should you invest $1,000 in Broadcom now?
Consider the following before buying shares in Broadcom:
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Keith Speights has positions in Apple and Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Should You Buy Broadcom Shares Outhand Before the 10-for-1 Stock Split? was originally published by The Motley Fool
