Broadcom (NASDAQ: AVGO) recently announced a 10-for-1 stock split, which will take effect after the market closes on July 12. That upcoming split will reduce its trading price from about $1,700 (as of this writing) to $170. A split merely carves a single share into smaller slices, so Broadcom’s underlying valuations will remain the same.
It also won’t make its stock more affordable, since most brokerages already allow investors to purchase fractional shares. However, the split will make Broadcom’s options cheaper to trade, since a single contract is tethered to 100 underlying shares, and it will make it easier for the company to pay out its stock-based compensation in smaller increments.
So unless you’re an options trader or Broadcom employee, you shouldn’t consider its stock split to be a major event. Instead, you should focus on the four reasons its stock is still a compelling investment even as it hovers near its all-time highs.
1. Broadcom’s expansion strategy is bold
Broadcom has constantly expanded over the past eight years. Singapore’s Avago Technologies acquired the original Broadcom for $37 billion in 2016, inherited its brand, and relocated its headquarters to the U.S. in 2018.
It also expanded into the infrastructure software market by acquiring CA Technologies for $19 billion in 2018, Symantec’s enterprise security division for $11 billion in 2019, and the cloud software giant VMware for $69 billion in late 2023.
That bold expansion turned it into one of the world’s largest chipmakers and infrastructure software providers. In its latest quarter, it generated 58% of its revenue from semiconductors and the remaining 42% from software.
Over the long term, it expects to generate about half of its revenue from software, thus reducing its dependence on the cyclical semiconductor sector and its top customer, Apple, which accounted for a fifth of its sales over the past two fiscal years.
Simply put, Broadcom isn’t a dusty old tech company that is running out of room to grow. It will likely keep expanding through big acquisitions to diversify its business and widen its moat against smaller chip and software companies.
2. Broadcom’s AI chip sales are soaring
Broadcom’s semiconductor business sells a wide range of wireless, optical, and data storage chips. But in the second quarter of fiscal 2024 (which ended this May), its sales of AI-related optical and networking chips soared 280% year over year to $3.1 billion and accounted for 25% of its top line.
That explosive growth, which was driven by the market’s insatiable appetite for generative AI applications, offset the softness of its enterprise and telecom markets in a challenging macro environment.
Seven of the top eight hyperscale AI clusters in deployment today currently use Broadcom’s chips, so it represents a good way to profit from the AI market’s long-term growth without putting too many of your eggs in the same basket.
3. Broadcom’s growth is consistent
From fiscal 2016 to fiscal 2023 (which ended last October), Broadcom’s adjusted revenue had a compound annual growth rate (CAGR) of 15%, its adjusted gross margin expanded from 60.5% to 74.7%, and its adjusted EPS increased at a CAGR of 21%. That robust growth tells us that Broadcom didn’t “di-worsify” its business with its big acquisitions.
For fiscal 2024, analysts expect its revenue and adjusted EPS to increase 44% and 12%, respectively, as it recognizes its first full year of VMware’s revenue. For fiscal 2025, they expect its revenue and adjusted EPS to grow 16% and 26%, respectively, assuming it doesn’t make any more big acquisitions.
4. Its stock is still reasonably valued
Broadcom’s stock trades at 37 times this year’s earnings and 29 times next year’s earnings. Those valuations aren’t cheap, but they’re reasonable for a stock that has nearly doubled over the past 12 months. It also pays a forward yield of 1.2%.
Some investors might argue that Nvidia, which is growing a lot faster and trades at 50 times forward earnings, is a better AI play. However, I think Broadcom is still a more balanced and better-diversified play on the AI, semiconductor, and infrastructure markets — and it still isn’t too pricey relative to its long-term growth potential.
When should you buy Broadcom?
It doesn’t matter if you buy Broadcom before or after its upcoming split. It might experience some more volatile trading days around that date, but that near-term noise is ultimately meaningless for long-term investors. Instead, they should focus on its core strengths to understand why it could hit new highs over the next few years.
Should you invest $1,000 in Broadcom right now?
Before you buy stock in Broadcom, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Broadcom wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $775,568!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of June 10, 2024
Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Apple and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Forget the Stock Split — These Are the 4 Reasons to Buy Broadcom’s Stock Now was originally published by The Motley Fool
Source: finance.yahoo.com