This year, many companies have announced stock splits after their stock prices rose. When these events occur, companies issue additional shares to current shareholders, reducing the price of each individual share proportionally. The goal is to make it easier for a wider range of investors to buy that particular stock.
Broadcom (NASDAQ: AVGO) The semiconductor and networking giant has benefited from the artificial intelligence (AI) boom, which has driven demand for its AI networks and custom accelerators. That has driven up its revenue, and its stock price has followed. It has gained nearly 90% over the past year and topped $1,800 for a time in June.
This top tech stock would make a solid long-term investment, but the question now is: should you invest in these stocks before or after the July 12 stock split? Let’s look at the arguments for both strategies and uncover the detail that provides the answer.
The case for buying before the split
A stock split does not fundamentally change anything about a company or its stock. Although the price per share is lower, the move has no real impact on valuation. This means that after the split, the stock could actually be more expensive than it was before. This is what happened with Nvidia recently – between the day he announced his split and the day of the event itself, the Shares of the tech giant soared by almost 30%.
So if you view Broadcom as a solid long-term player, it would be a great idea to go ahead and buy the stock now rather than waiting for it to realize what is simply a money play.
There are reasons to be optimistic for Broadcom. The combination of strong AI-related demand and its recent acquisition of cloud software company VMware appears poised to usher in a new era of growth for the company. In its most recent fiscal quarter, revenue grew 43% to more than $12 billion on the back of both. Given that we’re still in the early days of the AI boom and the VMware integration, it’s likely that there’s much more growth to come.
VMware revenue, which was about $2.1 billion in Broadcom’s fiscal first quarter, increased to $2.7 billion in its fiscal second quarter (which ended May 5), and management expects it to hit a quarterly revenue run rate of $4 billion. And Broadcom is forecasting AI revenue of more than $11 billion for fiscal 2024.
The case for buying after the split
The argument for buying after the split is also pretty straightforward. Sure, Broadcom won’t necessarily be cheaper after the split than it is today (unless the stock drops, and the stock’s moves won’t be tied to the split). But a lower price could make the stock easier for some investors to buy, because if you’re considering investing less than the current share price, you’ll be able to do so without resorting to fractional shares.
For example, if you want to invest $500 in Broadcom and you don’t have the ability to buy fractional shares through your broker (or you choose not to), you won’t be able to invest in the company directly. I say “directly” because you can still get exposure to Broadcom through the many index funds and exchange-traded funds that include the stock in their holdings.
But if you want to avoid the split stock route, it’s probably best to buy the shares after the split.
What should you do?
Both arguments make sense. So which one should you follow? With the split imminent, the decision should depend on how much money you have available to invest. If you’re considering investing the amount of Broadcom’s current stock price or more, there’s no reason to wait: now is the perfect time to get in on this big AI player.
However, if you are planning to invest less than the current stock price, it may be a good idea to invest right after the stock split, as you will have easier access to the full shares. Fractional shares are acceptable, but if your broker does not offer them, it can be complicated to try to get into Broadcom today. However, after the split, you will not have to worry about this anymore.
But what if the stock price goes up or down in the coming days, pushing the valuation up or down? If you’re a long-term investor, this won’t matter to you, because it won’t have much impact on your returns in a few years. It’s impossible to reliably predict where the market will go so you can buy a particular stock at its lowest price. But that’s okay. Generally, buying a solid business at a reasonable price gives you a good chance of generating attractive returns over the long term.
And before or after the next stock split, Broadcom should make a compelling growth buy in AI.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Should You Buy Broadcom Before or After the July 12 Stock Split? 1 Detail Gives Us the Answer was originally published by The Motley Fool
