Advances in artificial intelligence (AI) have garnered attention since early last year, and many companies have moved to capture this booming market. As a result, companies well positioned to benefit from this technology have seen their stock prices rise commensurate with this vast opportunity. A company ready for this paradigm shift is Broadcom (NASDAQ:AVGO)which supplies many semiconductors and other products that are key components of AI infrastructure.
The company’s consistent performance has fueled its stock price rise. Broadcom stock has gained 167% since the start of last year, marking the widespread use of generative AI. However, over the past decade, Broadcom’s revenues have jumped 881%, causing its net income to soar 843%. As a result, the stock soared 1,980%, enriching shareholders.
When the company reported its second-quarter results on Wednesday, investors were surprised: Management announced its first stock split since merging with Avago Technologies in 2016. The stock has soared more than 900% over the years that followed, which likely spurred management’s decision to split the shares. This revelation sparks renewed interest in the semiconductor and networking specialist.
Let’s take a step back to look at the stock split process and what it all means for investors.
The Fine Print of Stock Splitting
Broadcom revealed that its board of directors has approved a 10-for-1 forward stock split. This will require an amendment to the company’s restated certificate of incorporation, which CFO Kirsten Spears said will “proportionately increase shares ordinary authorized”.
As a result of this split, shareholders of record as of Thursday, July 11 will receive nine additional shares of common stock for each share held after the market close on Friday, July 12. Shares will begin trading on a split-adjusted basis. when the market opens on Monday July 15.
Broadcom shareholders do not need to take any further action to obtain the additional shares. Investment banks and brokerages handle the details, with the change happening behind the scenes. As a result, the newly created shares will simply appear in investors’ accounts.
It is important to note that the process may vary depending on the brokerage and account type, so additional shares may not appear immediately when the market opens on July 15. The process involves people and computers and can take hours or even days. so investors should be patient until the additional stocks appear.
Providing numbers for the equation can help highlight the stock split process. Broadcom stock was trading near $1,500 at market close Wednesday; for every share currently held, post-split shareholders will own 10 shares worth approximately $150 each.
Is a stock split a good thing?
It is clear from the illustration above that each shareholder’s total share of ownership will not change as a result of the stock split. In other words, it doesn’t matter whether you have one $20 bill or 20 $1 bills: the amount of cash you have is always the same. Likewise, Broadcom shareholders will simply have more shares at a lower price.
However, investor psychology comes into play and enthusiasm over the split could ultimately drive the stock price higher. Experts also believe that a drop in price will make the stock more acceptable to ordinary investors. In fact, in its statement, management said the goal behind its decision was to “make ownership of Broadcom stock more accessible to investors and employees.”
Although offering stocks at low prices may initially stimulate demand, the enthusiasm is usually short-lived. Over the longer term, investors are more interested in a company’s business and financial performance, the results of which will determine whether the stock price will rise or fall in the future.
Is Broadcom stock a buy?
By itself, the stock split is not a compelling reason to buy Broadcom stock. That said, the company’s positioning in the AI ecosystem and Broadcom’s accelerating results prove the stock is a buy.
In the second quarter, Broadcom reported revenue that jumped 43% year over year to $12.5 billion, a 4% quarter-over-quarter increase. This caused adjusted earnings per share (EPS) to rise 6% to $10.96.
As a reminder, analyst consensus estimates called for revenue of $12.03 billion and EPS of $10.84, so Broadcom easily beat expectations.
Management made it clear that strong demand for generative AI was behind these robust results, with AI product sales hitting a record $3.1 billion, or 25% of total revenue. of the company.
The news is also positive for income investors. Broadcom announced its quarterly dividend of $5.25 per share, which will be payable on June 28 to shareholders of record at the close of trading on June 24. This allows enough time for the dividend to be processed before the split takes place.
We’re still in the early stages of AI adoption, which suggests there’s more to come. The global AI market was estimated at $2.4 trillion in 2023 and is expected to rise to $30.1 trillion by 2032, according to Expert Market Research. This would represent a compound annual growth rate of 32%. As a provider of a broad range of semiconductors and related AI accessories, Broadcom is well-positioned to benefit from this strong and growing secular tailwind.
Broadcom has gained an impressive 34% so far in 2024, which has fueled a proportional increase in its valuation. The stock currently sells for 32 times forward earnings; while it is a slight premium compared to the multiple of 28 for the S&P500, it’s not really an apples-to-apples comparison. Broadcom stock has gained 427% over the past five years, compared to just 88% for the S&P 500, illustrating why Broadcom deserves a premium valuation.
For these reasons and more, Broadcom stock is a buy.
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Danny Vena has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Broadcom announces 10-for-1 stock split. Here’s what investors need to know. was originally published by The Motley Fool