Is Broadcom a Must Buy in July?

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We're quickly approaching Broadcom's ( NASDAQ: AVGO ) upcoming stock split on July 12, and with this split, investor expectations are rightly improving. The company's share price sits at around $1,750 at the time of writing, within spitting distance of its all-time high. Accordingly, for many investors, this split will be a closely-watched event, allowing many investors access to the company's shares for the first time.

One of the key reasons why Broadcom has continued to see strong momentum higher in recent months can be traced directly back to the AI boom. However, now that Broadcom's stock price has more than doubled over the past year, the question is just how much future growth has been priced into this stock at current levels.

Let's dive into this question, and whether Broadcom remains a must-buy in July, or if investors may be better served waiting on the sidelines for a bit before jumping in.

Key Points on Broadcom

• Broadcom is likely to continue benefitting from the surge in AI. This has led to it trading at more expensive multiples, but companies at the forefront of major trends rarely trade for "cheap" prices.
• The company is also benefitting from strong momentum after announcing a stock split.
• If you're looking for a detailed analysis on Broadcom, make sure to grab a complimentary copy of our brand-new "The Next NVIDIA" report . It's 38 pages long and is the most thorough report you'll find on AI investing opportunities today.

Stock Splits Matter

A highway sign showing a split in the road.

For Broadcom, or any company looking to split its shares, there are typically a few considerations that go into whether a stock split makes sense or not. Among the most notable considerations is the near-term boost companies typically get with splitting their shares, as more liquidity is added into the options market (options contracts become meaningfully cheaper) and investors are able to buy more full shares of stock for the same amount of money.

This typically leads to a much more robust and diverse investor base, encouraging fresh capital to flow into the stock, and has other knock-on effects like making employee compensation more manageable. For a company like Broadcom that's seen incredible growth in recent years, it also sends a signal to the market that more growth is on the horizon (companies that reverse split their shares would be the inverse of this argument).

Broadcom's 10-for-1 split that will be carried out on Friday will result in a share price around $175 apiece, much more manageable for the average investor. Here's what many investors may want to consider when it comes to buying this stock pre-split, or waiting for the split to take place first.

Broadcom Likely to Continue to Benefit from AI Surge

A person touching a see-through screen displaying a search bar and various AI symbols.

Broadcom's business model centers on designing and producing semiconductor devices. These products are used in a range of hardware applications, but AI demand has accelerated the company's growth profile, leading to a more than 10-fold increase in the company's stock price since Broadcom merged with Avago in 2016.

If one believes that artificial intelligence will eventually penetrate every hardware device out there (that has some software component to it), Broadcom's status as a leading semiconductor stock is one that should bode well for future growth. The company has seen impressive revenue growth since acquiring VMware, with its top line surging 43% year-over-year, and free cash flow coming in at $4 billion per quarter. On an annualized basis, that provides a free cash flow yield of about 2% at the time of writing. However, many analysts believe this number will improve greatly over the long-term.

There's a reason why AVGO stock trades at the multiple it does. It's not about past results as much as it is about future expected performance. At 75-times trailing earnings and 18-times sales, this is far from anything resembling a value stock. But in this market, growth is what matters most to the majority of investors.

Is Broadcom a Buy?

A man holding his hands up as to ask a question.

It's my view that Broadcom stock has plenty of growth priced in at current levels. The question is really whether the market is getting the company's forward growth rate right over the next two to five years. If Broadcom is able to exceed expectations in this regard, plenty of upside could be possible from here. And a stock split should help the momentum trade in the near-term.

That said, as a medium- to long-term investment, other high-growth AI stocks may be better picks in this current environment. I never thought I'd say this, but on a price-earnings-to-growth basis, companies like Nvidia ( NASDAQ: NVDA ) may be better relative value picks at current levels.

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