Broadcom just reported strong quarterly financial results, along with plans for a 10-for-1 stock split.
Some companies create so much value over the long term that their stock prices reach hundreds or even thousands of dollars, making them somewhat inaccessible to small investors.
For example, Nvidia The stock recently traded above $1,200 after a whopping 205% gain over the past year as sales of its artificial intelligence (AI) data center chips surged . As a result, the company just completed a 10-for-1 stock split that increased the number of shares outstanding tenfold while reducing the price per share by 90%. Investors can now buy Nvidia stock for just $129.
Stock splits are purely cosmetic, so they do not affect the value of the underlying company. But they can attract a broader group of investors, which often drives up the stock price when the new group of investors comes in and starts buying.
Meet the latest AI company to split its shares
Broadcom (AVGO 3.34%) is a technology conglomerate active in semiconductors, cybersecurity and even cloud software, which it has built both organically and through a wave of acquisitions.
Broadcom stock has soared 530% over the past five years, bringing it to a price of $1,679 as of this writing. Therefore, for the same reason that Nvidia did a stock split, Broadcom just announced its own 10-for-1 stock split. It will go into effect on July 15, when investors will be able to purchase an entire share of the company for around $167 (based on where it’s currently trading).
Beyond the stock split, here’s why investors might want to buy into the Broadcom story.
A multi-faceted AI game
Broadcom is responsible for several semiconductor and computing innovations in recent decades, including the optical mouse sensor and the world’s first small infrared transceiver that facilitated wireless data transfer between computers , telephones and printers. But the company was transformed when it merged with semiconductor giant Avago Technologies in 2016, and it has been on an acquisition spree ever since.
The new company Broadcom spent $98.6 billion between 2018 and 2023 buying three companies: semiconductor device supplier CA Technologies, cybersecurity giant Symantec and cloud software developer VMware. All are now developing AI, deploying it in their existing businesses, or serving other AI companies.
On the chip side, Broadcom is an expert in data center networking solutions and is seeing very strong demand for a number of products and services. The company says seven of the world’s eight largest AI graphics processing chip (GPU) chip clusters use its Ethernet connectivity solutions. Additionally, during the second quarter of fiscal 2024 (ended May 5), sales of Broadcom data center switches doubled year over year.
Switches like the Tomahawk 5 regulate how quickly data flows between servers and devices, so they are essential in high workloads like AI where thousands of GPUs work in tandem to train and develop models.
As for Broadcom’s other businesses, Symantec is integrating AI into its cybersecurity software in partnership with Alphabetof Google Cloud Vertex AI to provide customers with faster, more accurate protection. VMware, on the other hand, allows businesses to deploy virtual machines so that multiple developers can connect to a server to use its full capacity. Given the shortage of advanced AI chips, developers cannot afford to leave a data center’s computing capacity underutilized.
Image source: Getty Images.
Broadcom’s AI revenue explodes
Broadcom generated total revenue of $12.5 billion in the second quarter, representing growth of 43% from last year. This good result is mainly explained by the inclusion of the turnover of VMware, which was not part of the conglomerate in the second quarter of last year because the acquisition was not yet finalized.
But here’s a bigger point: Broadcom said $3.1 billion of its second-quarter revenue was attributable to AI, representing a whopping 280% increase from last year. Much of that comes from the company’s networking segment, which includes data center switches and Ethernet solutions, among other products and services.
If this pace of growth continues, it won’t be long before AI becomes Broadcom’s primary source of revenue. Management already expects AI revenue to exceed $11 billion for the entire fiscal year 2024 (ending October 30).
This undoubtedly played a role in the company raising its full-year 2024 revenue guidance to $51 billion, up from $50 billion previously.
Why Broadcom Stock is a Buy Now
Broadcom generated non-GAAP earnings per share of $43.55 over the last four quarters. Non-GAAP results exclude one-time expenses such as acquisitions and non-cash expenses such as stock-based compensation, so they are a good indication of the company’s actual performance. To account for Broadcom’s upcoming 10-for-1 stock split, investors would need to divide the company’s profits by 10 – so the figure above will become $4.35 after July 15.
Based on these earnings and Broadcom’s current stock price, the stock is trading at a price-to-earnings (P/E) ratio of 38.5. This makes it more expensive than Nasdaq-100 technology index, which trades at a P/E ratio of 30.9. However, Wall Street is forecasting rapid growth for the company, so the stock looks significantly cheaper as we look into the future.
For example, the Street estimates that Broadcom will generate earnings of $47.02 in fiscal 2024, putting the stock at a forward P/E ratio of 35.7. Earnings are then expected to rise to $57.22 in fiscal 2025, reducing the stock’s forward P/E to just 29.3. These estimates could rise further if the company’s meteoric AI growth persists over the next year.
Simply put — and assuming Wall Street’s forecasts are accurate — investors with a time horizon of two years or more could do extremely well if they bought Broadcom stock today.