Broadcom‘s (NASDAQ: AVGO) share price nearly doubled last year. The stock is up over 45% so far in 2024. That’s great news for shareholders. However, for some investors, this tremendous success pushed Broadcom’s share price so high (over $1,600) that they were reluctant to buy.
That won’t be a problem for too much longer. In its first-quarter update a few weeks ago, Broadcom announced plans for a 10-for-1 stock split after the market close on July 12, 2024. The semiconductor and software maker’s shares will trade on a split-adjusted basis beginning July 15, 2024.
Broadcom CFO Kirsten Spears said the purpose of this stock split for “to make ownership of Broadcom stock more accessible to investors and employees.” Some believe this greater accessibility could provide a nice catalyst for the already high-flying stock. Should you buy Broadcom stock hand over fist before its 10-for-1 stock split?
The case for Broadcom
Historically, stocks have jumped 25% during the 12 months following a stock split announcement, according to the Bank of America Research Investment Committee. Broadcom’s shares have risen only around 8% since the announcement of its stock split, so it could still have plenty of room to run if history is a guide.
Are there reasons to buy Broadcom stock other than a potential stock split surge? Absolutely. I’d put the company’s acquisition of VMware near the top of the list. This deal contributed significantly to Broadcom’s revenue soaring 43% year over year in the second quarter of 2024. Earlier this year, Broadcom CEO Hock Tan said that the company expects VMWare’s revenue growth will accelerate through the remainder of fiscal 2024.
However, the biggest reason to buy Broadcom stock is its artificial intelligence (AI) opportunity. Seven of the eight largest AI clusters in the world use Broadcom’s Ethernet technology. Broadcom expects its networking revenue to jump 40% this year primarily due to 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 doing it. As Tan said in the Q2 earnings call, the company has “the deepest and broadest understanding of what it takes for complex large workloads to be scaled out in an AI fabric.”
Broadcom is also a free cash flow (FCF) machine. In Q2, the company generated FCF of $4.4 billion — 36% of total revenue. If we exclude the cash Broadcom used for restructuring and integration, its FCF rose 18% year over year to $5.3 billion and made up 42% of revenue.
The case against Broadcom
Despite the excitement about Broadcom’s stock split, it won’t change anything about the company’s underlying business. Also, investors who wanted to buy the stock but were leery of its high share price could have done so with fractional shares.
Broadcom’s growth story wouldn’t be nearly as impressive without the VMWare deal. Excluding VMWare, Q2 revenue increased by only 12% year over year. The company won’t be able to rely on the acquisition to boost its year-over-year numbers after Q4, since the transaction closed on Nov. 22, 2023.
Some parts of Broadcom’s business remain weak. Wireless revenue in Q2 rose only 2% year over year. Server storage connectivity revenue fell 27%. Broadband revenue plunged 39%.
Just five customers generate roughly 40% of total sales. Apple alone makes up 17% of Broadcom’s total revenue. This reliance on a small number of customers presents a key risk for Broadcom.
The company’s AI opportunity is big. However, Nvidia could emerge as a strong competitor to Broadcom in Ethernet switching and custom AI accelerators.
There’s also a potential valuation concern. Broadcom stock trades at nearly 34 times forward earnings and 16.7 times trailing 12-month sales.
Buy before the split?
I don’t think investors should be in a rush to buy Broadcom stock before its stock split. My hunch is that the split will be largely a non-event rather than a major catalyst.
That said, Broadcom could remain a winner over the long term. Patient investors could buy now, wait until the stock split, or hold off for a pullback to buy on the dip. If you plan on owning Broadcom for 10 years or more, the exact timing of when you buy probably won’t matter all that much.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Keith Speights has positions in Apple and Bank of America. The Motley Fool has 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 Hand Over Fist Before Its 10-for-1 Stock Split? was originally published by The Motley Fool
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