A wide range of companies have announced stock splits this year after their share prices soared. When these events take place, companies issue additional shares to current stockholders, which lowers 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) has scheduled its 10-for-1 stock split for after the close of trading on July 12; shares will begin trading on a split-adjusted basis as of the opening bell on July 15. The semiconductor and networking giant has benefited from the artificial intelligence (AI) boom, which boosted demand for its AI networking and custom accelerators. That lifted its revenues, and the stock price followed. It has gained nearly 90% over the past year and surpassed $1,800 for a time in June.
This top tech stock would make a solid long-term investment, but now the question is: Should you get in on the shares before the July 12 stock split or after? Let’s consider arguments for both strategies — and discover the one detail that offers us an answer.
The case for buying before the split
A stock split doesn’t change anything fundamental about a company or its stock. Though the per-share price will be lower, the maneuver doesn’t impact valuation in any real way. That means that post-split, the stock actually could be more expensive than it was beforehand. This happened with Nvidia recently — between the day it made its split announcement and the actual day of the event, the tech giant’s shares climbed by nearly 30%.
So if you consider Broadcom a strong long-term player, it would be a great idea to go ahead and buy the stock now rather than waiting for it to complete what is simply a piece of financial juggling.
And there are reasons to be optimistic about Broadcom. The combination of strong AI-related demand and its recent acquisition of cloud software company VMware look set to drive a new era of growth for the company. In its latest reported fiscal quarter, its revenue rose 43% to more than $12 billion thanks to these two elements. Since we’re in the early days of the AI boom and VMware integration, there’s likely a lot more growth to come.
VMware revenue, from about $2.1 billion in Broadcom’s fiscal first quarter, grew to $2.7 billion in its fiscal Q2 (which ended May 5), and management expects it to reach a $4 billion quarterly revenue run rate. And Broadcom forecasts AI revenue for fiscal 2024 of more than $11 billion.
The case for buying after the split
The argument for buying after the split is pretty straightforward too. True, post-split, Broadcom won’t necessarily be any cheaper than it is today (unless the stock falls, and stock movements will be unrelated to the split). But a lower price could make it easier for some investors to buy the stock because if you plan on investing less than the stock’s current share price, you will be able to do so without relying on fractional shares.
So, for example, today if you want to invest $500 in Broadcom and don’t have the option through your broker of buying fractional shares (or if you choose not to), you won’t be able to directly invest in the company. I say “directly” because you can always gain 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 fractional share route, you’re probably better off buying the shares post-split.
What should you do?
Both of these arguments are logical — so which should you follow? Since the split is right around the corner, the decision should come down to the funds you have available to invest. If you plan on investing the amount of Broadcom’s current share price or more, there’s no reason to wait — now is a great time to get in on this top AI player.
However, if you’re planning on investing less than the current share price, it may be a good idea to invest right after the stock split as you’ll more easily be able to access full shares. Fractional shares are fine, but if your brokerage doesn’t offer them, trying to get in on Broadcom today may be complicated. After the split, though, you won’t have to worry about this.
But what if the stock rises or falls in the coming days, pushing valuation higher or lower? If you’re a long-term investor, this won’t matter for you, because it won’t have much of an impact on your returns a few years down the road. It’s impossible to reliably time the market so that you can buy any particular stock at its lowest price. But that’s OK. Generally, buying a strong company at a fair price offers you a great chance of generating attractive returns over the long run.
And before or after the upcoming stock split, Broadcom should make a compelling AI growth buy.
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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
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