When Broadcom (NASDAQ: AVGO) released the results of its fiscal 2024 second quarter, ended May 5, the company delivered results that sailed past Wall Street's expectations. More intriguing for shareholders, however, was another development.
In conjunction with its financial report, Broadcom's management revealed a 10-for-1 stock split . Since its announcement on Jun 12, shares have climbed 6% (as of this writing), and the stock has gained 93% over the past year. This helps to illustrate the ongoing interest from investors, likely spurred higher by the vast opportunity represented by artificial intelligence (AI) .
The stock split is scheduled to take place after the market close on Friday, July 12. Does the upcoming stock split make Broadcom a once-in-a-generation investment opportunity? Let's see what the evidence reveals.
Image source: Getty Images.
Stock split recap
A quick review of the purpose of the stock split can help give this process context. If a company delivers strong operational and financial performance over an extended period, demand for stock ownership increases, which is reflected in an increasing share price. Unfortunately, this oft times makes the stock inaccessible to some everyday investors.
To rectify the situation, management can initiate a stock split, reducing the share price. The company noted in its report that the purpose of the split was "to make ownership of Broadcom stock more accessible to investors and employees." The result is that everyday investors will be better able to buy full shares rather than resorting to purchasing fractional shares , which are available at a number of brokerage firms.
Once the stock split is completed, shareholders of record will receive nine additional shares of Broadcom stock for every share they own. At the same time, the price of each share will be reduced to 1/10th of the price, so the total value of each shareholder's investment won't change.The stock is due to split after the market close on Friday July 12, and begin trading on a split-adjusted basis on Monday, July 15. What should be more important to investors, however, is that the same factors that have driven Broadcom stock higher in recent years will still be at work.
Is Broadcom stock a buy?
The process of the stock split aside, the quintessential investing question remains: Is Broadcom stock a buy before its highly publicized stock split? Let's take a look at the company's recent results.
In the second quarter, Broadcom reported revenue of $12.5 billion, jumping 43% year over year and 4% sequentially. This pushed adjusted earnings per share (EPS) of $10.96 up 6%. Management said robust demand for generative AI was driving the results, noting that sales of AI-related products surged to a record $3.1 billion and now accounted for 25% of the company's total revenue.
Management suggested the trend will likely continue. Broadcom raised its full fiscal year guidance to $51 billion, which would represent year-over-year growth of 42%.
The company is also developing a consistent track record of dividend payments. Broadcom is now in its 14th consecutive year of increasing payouts. From humble beginnings in mid-2013, the company has increased its payout from $0.21 to $5.25 per quarter, an increase of 2,400%. Wall Street expects Broadcom to earn $47.49 per share in 2024. That works out to a payout ratio of 44% of this year's expected profits, based on the current quarterly dividend, so there's plenty of room to increase the payout.
A once-in-a-generation investment opportunity?
Most experts agree that the accelerating adoption of AI has only just begun, and demand will only grow from here. Because generative AI automates many time-consuming and mundane tasks, it increases productivity, which leads to higher profits.
While estimates vary considerably, the impact of generative AI on the economy is expected to be between $2.6 trillion to $4.4 trillion over the coming decade, according to research compiled by McKinsey & Company, representing a once-in-a-generation opportunity. It's worth noting, however, that estimates have been increasing over time, so the actual impact may be higher as new applications for AI are created. Broadcom's extensive reach in technology circles gives the company the potential to grab an increasingly larger piece of the AI pie.
Over the past five years, Broadcom has been on fire, as revenue increased 126%, driving net income up 197%. This, in turn, has driven the stock price up 463% during the same period (as of this writing), more than five times the returns of the S&P 500 . Furthermore, the stock has gained 93% over the past year alone, as its pivotal place in the AI ecosystem is boosting its results.
Broadcom currently trades for 33 times forward earnings, which is a premium compared to a multiple of 28 for the S&P 500. However, given its significant outperformance over the past five years, its clear that Broadcom is deserving of a premium.
Given the company's strong track record of results, pervasive reach, and prevailing secular tailwinds, I would argue that the evidence supports the case that Broadcom is a once-in-a-generation investment opportunity ahead of its 10-for-1 stock split. That said, I don't think it matters if you buy Broadcom before or after the stock split -- as long as you buy it.
Danny Vena has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0