Broadcom‘s (NASDAQ: AVGO) the stock price has almost doubled in the last year. The stock is up more than 45% so far in 2024. That’s great news for shareholders. However, for some investors, this tremendous success caused Broadcom’s stock price to rise so high (over $1,600) that they were reluctant to buy it.
This won’t be a problem for much longer. In its first quarter update a few weeks ago, Broadcom announced plans to implement a 10-to-1 system. stock split after market close on July 12, 2024. Shares of the semiconductor and software maker will trade on a split-adjusted basis beginning July 15, 2024.
Kirsten Spears, Broadcom’s chief financial officer, said the goal of the stock split was “to make ownership of Broadcom stock more accessible to investors and employees.” Some believe this greater accessibility could be a good catalyst for the already booming stock. Should you buy Broadcom stock big time before the 10-for-1 stock split?
The Broadcom Case
Historically, stocks have jumped 25% in the 12 months following a stock split announcement, according to the Bank of America Research Investment Committee. Broadcom shares are up only about 8% since its stock split announcement, so there could still be plenty of room for upside if history is any guide.
Are there any reasons to buy Broadcom stock other than a potential stock split? Absolutely. I would put the company’s acquisition of VMware at the top of the list. That deal contributed significantly to Broadcom’s 43% year-over-year revenue increase in the second quarter of 2024. Earlier this year, Broadcom CEO Hock Tan said the company expects VMWare revenue growth to accelerate through the end of fiscal 2024.
However, the biggest reason to buy Broadcom stock is its artificial intelligence (AI) potential. Seven of the world’s eight largest AI clusters use Broadcom’s Ethernet technology. Broadcom expects its networking revenue to grow 40% this year, driven primarily by AI-related demand.
The company’s AI accelerator business is highly profitable. Creating networks to connect AI accelerators is complicated. But Broadcom is arguably the best at this. As Tan said during the second quarter earnings conference call, the company has “the deepest and broadest understanding of what it takes to bring large, complex workloads to scale.” scale in an AI structure.”
Broadcom is also a free cash flow (FCF) machine. In the second quarter, the company generated FCF of $4.4 billion, or 36% of total revenue. Excluding cash used by Broadcom for restructuring and integration, its FCF increased 18% year over year to $5.3 billion and represented 42% of revenue .
The case against Broadcom
Despite the excitement surrounding Broadcom’s stock split, it won’t change anything about the company’s underlying business. Moreover, investors who wanted to buy the stock but were wary of its high price could have done so with fractional shares.
Broadcom’s growth wouldn’t be nearly as impressive without the VMWare deal. Excluding VMWare, second-quarter revenue was up just 12% year over year. The company won’t be able to rely on the acquisition to boost its year-over-year numbers after the fourth quarter, since the deal closed on November 22, 2023.
Some of Broadcom’s businesses remain weak. Second-quarter wireless revenue rose just 2% from a year earlier. Server storage connectivity revenue fell 27%. Broadband revenue plunged 39%.
Just five customers generate about 40% of total sales. Apple alone accounts for 17% of Broadcom’s total revenue. This dependence on a small number of customers poses a major risk to Broadcom.
The opportunity that AI represents for the enterprise is great. However, Nvidia could become a serious competitor to Broadcom in the field of Ethernet switching and custom AI accelerators.
There’s also a potential valuation issue. 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 shares ahead of the split. My hunch is that the split will be a non-event rather than a major catalyst.
That said, Broadcom could remain a winner in the long term. Patient investors could buy now, wait for the stock split, or wait for a pullback to buy on the dip. If you plan to own Broadcom for 10 years or more, the exact timing of the purchase probably won’t matter much.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Keith Speights holds positions in Apple and Bank of America. The Motley Fool holds 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 stock with open arms ahead of its 10-for-1 stock split? was originally published by The Motley Fool
