Artificial intelligence (AI) has been driving the revenue and share price growth of many technology companies in recent times. Investors are piling into these players that are benefiting from the AI boom now and could have even more to gain down the road. After all, analysts predict that today’s $200 billion AI market might surge past $1 trillion by the end of the decade.
Broadcom (NASDAQ: AVGO) is one of the players benefiting from the movement. The semiconductor and networking giant has seen demand take off, and this has helped the stock price to climb more than 60% since the start of the year. But Broadcom just announced a move that soon will bring its high-flying stock down to Earth. The tech company is planning a stock split next month, an operation that will lower its stock price from more than $1,800 today to about $180.
Now the question is: Should you buy Broadcom now or wait to get in on this AI player after the stock split? Let’s find out.
Why Broadcom’s a good buy
First, a bit of background on Broadcom itself and why the company generally is a good buy. Broadcom makes a wide variety of semiconductor and infrastructure software products — in fact, the company produces thousands of products used in a variety of areas, from data center servers to smartphones. More than 99% of internet traffic travels through Broadcom technology, a statistic showing the major role of this company in the areas of networking and connectivity. Further expanding its revenue opportunity, Broadcom recently completed its acquisition of cloud computing software company VMware.
In the most recent quarter, Broadcom reported a 43% increase in revenue to more than $12 billion. And AI revenue, driven by demand for AI networking and custom accelerators, surged 280% to $3.1 billion. During the quarter, Broadcom doubled the number of switches sold, and the company is developing next-generation switches, optics, and other tools that will support the networking needs of AI data centers in the coming years.
Broadcom has a positive track record, growing revenue and profit into the billions of dollars over the years. And this year, thanks to the VMware integration and AI demand, the company raised its full-year revenue forecast to $51 billion — that represents an increase of 42% from last year’s revenue level.
All about the Broadcom stock split
So, Broadcom is a buy — but should you get in on the stock today or after the split? A stock split is a mechanical movement to lower the price of each individual share by issuing more shares to current holders, but it doesn’t change the total market value of the company or the stock’s valuation. Broadcom is planning a 10-for-1 stock split, so if you hold one share, you’ll receive an extra nine after the July 12 market close. The stock will begin trading at the split-adjusted price on July 15.
Broadcom may actually be more expensive post-split if the stock continues to climb. It’s already advanced about 20% since the company announced the operation, and this has pushed its valuation higher. Today, Broadcom trades for 37 times forward earnings estimates, higher than levels of about 25 earlier this year. But considering Broadcom’s AI growth and the contributions from VMware, the price still looks very reasonable at current levels.
Of course, it’s impossible to predict day-to-day stock movements. Broadcom also could decline from now through the stock split and end up trading at a lower valuation post-split.
So, what should you do? Keep in mind that, when investing over the long term, short-term price movements won’t impact your returns by much. A 20% gain or loss over the next couple of weeks won’t matter if the stock delivers an increase over the coming five to 10 years.
It’s true that if you have, say, $200 to invest in Broadcom, buying post-split may be easier because you’ll buy a full share rather than investing in fractional ones — especially if your brokerage doesn’t offer fractional shares. But if your budget equals the price of one full share right now or more, there’s no reason to wait for the split to get in on this top AI stock. It makes a great buy today.
Should you invest $1,000 in Broadcom right now?
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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.
Should You Buy Broadcom Now — or After the Stock Split? was originally published by The Motley Fool
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