Does it feel like you’ve been here before? Semiconductor and software giant Broadcom (NASDAQ:AVGO) executed a 10-for-1 stock split over the summer. Yet here I am waving the flag for a new possible stock split.
Maybe that’s a good thing. Shares of Broadcom are up nearly 30% since the last split, although most of that has only occurred in the past few weeks.
Does it make sense to split again? After all, stock splits do not make a share fundamentally cheaper; they lower the stock price by proportionally increasing the total number of shares.
So should investors expect Broadcom to announce another stock split soon?
Most companies split their shares to make trading easier for smaller investors and employees. Investors can acquire shares in the company without needing deep pockets. Meanwhile, employees who make significant gains on the shares they received as compensation appreciate more control over how much they cash out at a time.
There are no rules about why or how often a company can split its shares. Broadcom wouldn’t even be the first company to split its shares multiple times in a short period of time. Tesla conducted two stock splits in the two years between August 2020 and 2022. Each share that investors owned before that split would equate to 15 shares today.
Granted, the Tesla splits were about two years apart, and the recent Broadcom split was only five months ago. I wouldn’t say the odds are super high that Broadcom will split its stock in the next month or two. However, I think there is a high chance of another split in the coming years.
Broadcom recently announced exciting developments regarding its artificial intelligence (AI) capabilities when it reported quarterly earnings for fiscal 2024 (ending November 3). Broadcom is developing XPU (extreme processing unit) AI chips for three major customers, with two more in the works. Management wouldn’t drop any names, but OpenAI and Apple are said to be among them.
These XPU chips are reportedly used for AI inference, allowing AI models to effectively apply their trained intelligence to new data they haven’t seen before. You might think of AI training as achieving intelligence and AI inference as using it. It’s a different application than training the AI models, which Nvidia has dominated with its accelerator chips. According to the company’s most recent conference call, Broadcom management believes AI-related revenues will be between $60 billion and $90 billion by 2027 and the company is poised to capture a large portion of that.
That’s a big deal because Broadcom’s AI revenue for the full fiscal year 2024 was $12.2 billion, a fraction of that. Companywide revenue was $51.5 billion, so AI is a growth catalyst that could lead to Broadcom doubling its revenue over the next five to 10 years.
No one can know at what price Broadcom would consider splitting again, but logically, the higher the stock goes, the higher the odds. Broadcom was trading at more than $1,000 per share when it split in July. The stock isn’t anywhere near that today, but rose to over $250 at one point.
The stock trades at a price-to-earnings growth ratio (PEG) of around 2, which is reasonable for a high-quality company like Broadcom. In other words, Broadcom’s price-to-earnings ratio is appropriate for its expected earnings growth, which analysts predict will average almost 18% over the next three to five years. Given the recent AI updates, growth estimates may increase in the coming months. Higher growth expectations and a reasonable valuation can mean higher share prices.
If Broadcom hits $350 to $400 per share, it could put a stock split on the table. The next split can be less dramatic than the previous one, such as 4-for-1 or 2-for-1. Keep in mind that stock splits should not be the reason you buy a stock, as they do not impact per-share financials or increase a company’s market value.
Broadcom’s long-term AI advantage makes it an attractive investment, so consider a potential stock split as a bonus.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has and recommends positions in Apple and Tesla. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Stock-Split Watch: Is Broadcom Next? was originally published by The Motley Fool
