Broadcom Announces a 10-for-1 Stock Split. Time to Buy? | The Motley Fool

Shares of Broadcom (AVGO 3.34%) have surged impressively in the past year with gains of 96%, and the good part is that this semiconductor giant looks all set to sustain its solid momentum following the mid-June release of its fiscal 2024 second-quarter results (for the three months ended May 5).

Not only did the chip giant’s revenue and earnings coast past consensus estimates, but management also announced a 10-for-1 forward stock split that will go into effect on July 15. This makes Broadcom the latest company to join the stock-split club, and it wasn’t surprising to see management making this move.

After all, Broadcom’s terrific rally in the past year, which has been fueled by the growing demand for its artificial intelligence (AI) chips, has brought its share price to more than $1,700. CFO Kirsten Spears said the stock split is being executed to “make ownership of Broadcom stock more accessible to investors and employees.”

Now, a stock split is a cosmetic move since it simply reduces the share price of a company by increasing the number of outstanding shares. It doesn’t have any impact on the fundamentals or the market cap of the company. Even so, investors are cheering the results and the stock split, sending the stock up 12% following the announcement.

But if you’re one of those who missed Broadcom’s rally and want to add a top semiconductor stock to your portfolio, should you buy it following the latest announcements?

AI is giving Broadcom a nice boost

Broadcom’s quarterly revenue shot up 43% year over year to $12.5 billion, exceeding the $12.06 billion consensus estimate. The chipmaker’s adjusted earnings of $10.96 per share was also better than the Wall Street expectation of $10.85 per share.

Excluding the acquisition of VMware that was completed in November 2023, Broadcom’s revenue increased 12% year over year on an organic basis. Even better, the company increased its full-year guidance and now expects to end the fiscal year with $51 billion in revenue as compared to the prior forecast of $50 billion. The updated guidance is better than analysts’ estimate of $50.6 billion.

The booming demand for Broadcom’s AI chips is a big reason why the company has increased its full-year guidance. More specifically, Broadcom’s revenue from sales of AI chips increased a whopping 280% year over year to $3.1 billion. The company is now expecting its AI revenue in fiscal 2024 to come in at $11 billion, up from the earlier estimate of $10 billion, which is precisely the figure by which Broadcom has raised its full-year guidance.

It is worth noting that AI is giving Broadcom’s business a lift in a couple of ways. First, the demand for the company’s Ethernet networking switches has improved considerably to enable fast transfer of data in AI data centers. Second, Broadcom’s hyperscale customers have increased the deployment of its custom AI chips in data centers, and the good part is that the company seems to be winning more business from them.

Broadcom CEO Hock Tan remarked on the latest earnings conference call that the company has “just been awarded the next-generation custom AI accelerators for these hyperscale customers of ours.” As a result, it won’t be surprising to see the chipmaker’s AI revenue growth accelerating in the current fiscal year and beyond.

That’s because the market for Ethernet switches is growing at an impressive pace, jumping 20% in 2023 thanks to AI. The global AI data center switch market is forecast to grow at an annual rate of 38% through 2029, generating $20 billion in annual revenue at the end of the forecast period. Meanwhile, the demand for custom AI accelerators is increasing rapidly as well.

So, Broadcom is sitting on a secular growth opportunity thanks to AI, which should allow it to maintain a healthy pace of growth in the long run.

Is the stock a buy right now?

Though the stock split is going to lower the price of each Broadcom share and make it more accessible to smaller investors, it would be worth looking at the company’s valuation before investors decide to put their money in the stock.

Broadcom currently sports a trailing price-to-earnings (P/E) ratio of 64. That’s expensive when compared to the Nasdaq-100 index’s earnings multiple of 31 (using the index as a proxy for tech stocks). However, the forward P/E of 31 points toward a nice bump in its bottom line and shows that the stock isn’t expensive on a forward basis.

Broadcom remains a top AI stock to buy right now following its latest quarterly report thanks to the company’s growing AI business, as well as the fact that the stock-split announcement could give its shares a nice boost, even though it isn’t going to change Broadcom’s already solid prospects.