The moment Broadcom (NASDAQ: AVGO) investors and potential investors have been waiting for is almost here: The company’s 10-for-1 stock split happens later this week. Broadcom will become the latest high-flying stock, following Nvidia and Chipotle Mexican Grill last month, to bring its stock price down to Earth.
Stock splits lower the price of individual shares to make them more accessible to a broader range of investors. Broadcom’s shares have taken off in recent years, climbing about 500% in five years, and now trade for more than $1,700. The semiconductor and networking company also has seen earnings advance thanks to demand from artificial intelligence (AI) customers.
So, what should we expect from the upcoming stock split? Let’s find out.
Why launch a stock split?
First, a bit about stock splits in general. A company usually decides to launch such an operation after its stock price has climbed significantly — and often that comes following solid growth or earnings performance. The idea is to make it possible for more investors to get in on the stock without relying on fractional shares.
And the lower per-share price tag can make the stock more appealing to some investors. For example, the level of $1,000 per share can be a psychological barrier — certain investors perceive a stock as expensive even if its valuation looks fine.
In a stock split, a company issues more shares to current holders to lower the per-share price, and the final price is determined by the ratio of the split.
Now, let’s talk about what to expect this week from Broadcom. The company plans to offer those who are shareholders as of the market close on July 11 nine new shares for every one held. Broadcom will issue the shares after the July 12 close. But if you buy the stock during the July 12 trading session, don’t worry — the right to the additional shares transfers over to the new holder.
The stock then will start trading at the post-split price on July 15 as of market open. Considering today’s price of about $1,700, the new price should be about $170.
A mechanical operation
Broadcom announced the split on June 12, and since that time the stock has gained about 15%. The split is positive because it will make it easier for more people to invest in Broadcom, and it suggests the company is optimistic about its future. But it’s important to remember stock splits are mechanical operations — and they don’t change anything fundamental about a company like valuation or market value.
So, investors don’t buy or sell a stock just because it’s announced a stock split. The positive trend we’ve seen in Broadcom’s stock performance, instead, is linked to the company’s growth and future prospects. In the recent quarter, Broadcom reported a 43% increase in revenue — and the company expects full-year revenue will rise about 42% compared to last year’s figure.
All of this means I wouldn’t expect Broadcom’s shares to surge right after the upcoming stock split. What does this mean for you as an investor? As mentioned, the stock split itself doesn’t change anything about Broadcom or the investment opportunity — so it doesn’t make the stock a buy or a sell, and it’s not likely to impact share performance.
Time to buy?
If you’re wondering whether you should buy Broadcom right now, it’s a good idea to look to the company’s earnings track record and future prospects, and the stock’s valuation. Broadcom has increased earnings over time, and the company’s AI business and recent acquisition of cloud software player VMware represent significant growth drivers moving forward.
This makes the stock, trading at 36 times forward earnings estimates, look very reasonably priced. (Valuation won’t change much post-split unless the stock price makes a major move within the next few days.)
So, even though the upcoming stock split isn’t a catalyst for share-price performance, Broadcom still makes a great stock to buy today and hold for the long term.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Broadcom’s Stock Split Happens on July 12. Here’s What to Expect. was originally published by The Motley Fool
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