At today’s stock market close, Broadcom (NASDAQ: AVGO) will make a move to slash its high-flying share price. The technology giant will complete a 10-for-1 stock split, lowering the price of its stock from more than $1,700 to about $170. The stock will start trading at the new price as of the market open on Monday.
Broadcom shares have soared nearly 100% in the past year as demand from artificial intelligence (AI) customers picked up — in the recent quarter alone AI revenue surged 280% to $3.1 billion. Investors also have applauded Broadcom’s acquisition of cloud software company VMware, a key driver of growth in the quarter.
Broadcom’s operation today doesn’t erase the stock’s fantastic past performance — it just lowers the price of each individual share by issuing more shares to current holders. And this purely mechanical operation doesn’t change anything fundamental about the company like valuation or market value. But it isn’t exactly a non-event, either. Here’s what the Broadcom operation means for the stock and for you.
Nine new shares
If you’re already a Broadcom shareholder, after the market close today you’ll receive nine new shares for every one you already hold. This doesn’t change the total value of your holding, but it could make it easier for you to add to or reduce your position in the tech giant.
For example, if you have a budget of a couple of hundred dollars, you now can buy a full share of Broadcom instead of turning to fractional shares. And if you held only one or two shares before the split, you now will hold a total of 10 or 20 — so if you want to trim your holding, you can do it without selling off your entire position.
If you’re not yet a Broadcom shareholder and plan on investing a few thousand dollars in the stock, today’s operation won’t change anything for you. But if you aim to invest a few hundred dollars in the company, the stock split will make your purchase easier. That’s because with that amount you’ll be able to buy full shares rather than fractional ones. Fractional shares are fine, but some brokerages don’t offer them.
So, the stock split makes the trading of Broadcom shares easier for some investors, and that’s positive. It could even encourage more investors to choose the stock — but this doesn’t happen overnight, and the investment decision generally is based on fundamentals like the company’s earnings and outlook.
Broadcom’s view of the future
Broadcom’s move to launch a split also expresses the company’s confidence in its future. The idea is, from this new lower price, the stock has what it takes to soar once again. And companies that decide to split their stock generally have done well — earnings growth often has boosted the stock price over time. This means it’s worth giving stock split stocks a second look to see if they still represent solid long-term investment opportunities and would make a good addition to your portfolio.
Considering this, is Broadcom likely to rise after its stock split, extending its winning track record? The company recently reported strong growth thanks to demand from AI customers and solid performance from VMware. And both of these revenue sources are just getting going. In the case of AI, the market is forecast to grow from about $200 billion today to more than $1 trillion by the end of the decade. As for VMware, the integration of this business is recent, meaning Broadcom should have more to gain in the coming quarters.
So, there’s reason to be optimistic about the overall growth of this semiconductor and networking giant. This may not necessarily translate into major gains right after the stock split, but over time, Broadcom’s earnings and stock price should head higher. And that’s great news for current shareholders — and investors who plan on buying after the stock split.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Broadcom’s Stock Split Happens Today. Here’s What it Means for You. was originally published by The Motley Fool
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