Why Broadcom’s (AVGO) 10-for-1 Stock Split Could Attract New Investors

Broadcom (AVGO), a leading company in the semiconductor industry, took advantage of this year’s stock price rise and announced a 10:1 stock split scheduled to take effect on July 15, 2024. This decision follows outstanding second quarter results that highlight Broadcom’s strategic positioning amid the burgeoning artificial intelligence (AI) revolution.

Understand the stock split mechanism and strategic implications for Broadcom

A stock split involves dividing existing stock into multiple shares, effectively lowering the stock price proportionately while maintaining the company’s overall market capitalization. In the case of AVGO, each shareholder will receive 9 additional shares for each share held, increasing the number of shares outstanding by 10.

The main purpose of a stock split is to lower the nominal share price, making the stock more affordable and accessible to a broad range of retail investors. Given that Broadcom’s stock price recently topped $1,800, the split aims to address perceived affordability barriers that may have deterred investors.

Increased accessibility could expand AVGO’s investor base, potentially stimulating demand for its shares. As a result, it is common for trading volume to increase as the number of shares outstanding due to a stock split increases. This improved liquidity can benefit both existing and new investors, making it easier to enter and exit positions.

Comparison with NVIDIA’s recent similar moves

Broadcom’s stock split reflects a similar move. NVIDIA Corporation (NVDA), a rival in the AI ​​hardware market. As more individual investors gained access to Nvidia’s stock following the split, which took effect at the close of trading on June 7, an increase in trading activity and demand was observed, potentially pushing the stock price higher.

Nvidia’s stock is trading above its 50-day and 200-day moving averages of $99.28 and $68.61, respectively. NVDA’s successful spin-off this month was preceded by significant market gains, highlighting the strategic timing of Broadcom’s decision to capitalize on the investor sentiment surrounding the AI ​​and semiconductor sectors.

Historically, stock splits have been viewed as bullish signals. According to BofA research data, the total returns of companies that announce stock splits are: Approximately 25% over 12 months That compares with a 12% gain for the S&P 500 index after the stock split.

Broadcom’s unprecedented growth amid the AI ​​boom

AVGO, with a market capitalization of $839.05 billion, is a technology leader that develops and supplies semiconductor and infrastructure software solutions. The company manufactures sophisticated networking chips for processing vast amounts of data used in AI applications such as OpenAI’s ChatGPT, positioning itself as one of the beneficiaries of increased corporate investment amid the boom.

According to Grand View Research, the global AI market is Reach $1.81 trillion by 2030, growing at a CAGR of 36.6% during the forecast period (2024-2030). As AI continues to revolutionize a variety of industries, including automotive, healthcare, retail, finance, and manufacturing, chip manufacturers like Broadcom are leading the way in providing the essential chips that power AI applications.

Broadcom’s second quarter performance was primarily driven by AI demand and VMware. for Quarter ended May 5, 2024, AVGO’s net revenue increased 43% year over year to $12.49 billion. Sales topped consensus estimates of $12.01 billion. During the quarter, AI product revenue hit a record high of $3.1 billion. Broadcom reported triple-digit revenue growth in its Infrastructure Software segment to $5.29 billion as enterprises increasingly adopt the VMware software stack to build private clouds.

AVGO’s gross margin increased 27.2% year over year to $7.78 billion. Non-GAAP operating income increased 32% year-over-year to $7.15 billion. Additionally, the company’s non-GAAP net income was $5.39 billion, or $10.96 per share, up 20.2% and 6.2%, respectively, from the prior year. EPS exceeded analysts’ expectations of $10.84.

Additionally, the company’s adjusted EBITDA increased 30.6% year over year to $7.43 billion. It reported free cash flow, excluding restructuring and consolidation, of $4.45 billion, an 18% increase over the previous year. As of May 5, 2024, AVGO had cash and cash equivalents of $9.81 billion.

Following strong financial performance, Broadcom raised its guidance for fiscal 2024. The company expects annual sales to reach approximately $51 billion. Adjusted EBITDA is expected to be approximately 61% of projected revenue.

favorable analyst estimates

Analysts expect AVGO’s third quarter (ending July 2024) revenue to hit $12.92 billion, up 45.6% year-over-year. The consensus EPS estimate for the quarter is $12.11, up 14.9% from the year-ago period. Moreover, the company has topped consensus revenue and EPS estimates in each of the four subsequent quarters, which is impressive.

The Street expects Broadcom’s revenue and EPS to hit $43.37 billion and $47.74 for the fiscal year ending October 2024, up 43.4% and 13%, respectively, from the prior year. Additionally, the company’s revenue and EPS for fiscal 2025 are expected to be $59.22 billion and $5,995, up 15.3% and 25.6%, respectively, from the previous year.

conclusion

As AI continues to revolutionize multiple sectors, chip manufacturers like Broadcom are leading the way, providing the essential semiconductor and infrastructure software solutions that support this technology. Driven by strong AI demand and VMware, AVGO reported solid second-quarter results that surpassed analyst expectations for revenue and revenue.

Management expressed confidence in the company’s growth prospects by raising its fiscal 2024 revenue guidance to $51 billion and adjusting EBITDA to 61% of sales. Additionally, AVGO’s strong financial strength has allowed it to authorize a quarterly dividend of $5.25 per share, payable on June 28, 2024.

The company pays an annual dividend of $21 per share, which equates to a yield of 1.17% based on the current stock price, while its four-year average dividend yield is 2.69%. Dividend payments have grown at a compound annual growth rate (CAGR) of 12.9% and 17.5% over the past three and five years, respectively. Broadcom also raised its dividend for 13 consecutive years.

In its last quarterly earnings call, AVGO announced a 10-for-1 stock split of its common stock, giving investors easier access to Broadcom stock. The company’s decision to conduct a stock split represents a strategic move to increase shareholder value and expand investor participation.

By making its stock more accessible and more liquid, Broadcom is positioned to attract a broad range of investors looking to capitalize on the AI-driven semiconductor boom. The stock split is a pivotal catalyst that will further advance AVGO’s growth trajectory and solidify its position as a significant player in the evolving technology industry.

In a report released June 16, William Stein of Truist Financial said: Maintain Buy rating on AVGO, the target price is $2,045. Additionally, Oppenheimer’s Rick Schafer said: Broadcom’s price target is set at $1,500 to $2,000. While maintaining the investment opinion of Buy.

In addition to Oppenheimer’s rating update, other analysts have adjusted their price targets for AVGO. Hari Toshiya of Goldman Sachs raised the target stock price from $1,550 to $1,850 and maintained a strong buy rating. JP Morgan’s Harlan Sur also raised his price target to $2,000 from $1,700 and maintained a Strong Buy rating on the stock.

In conclusion, for investors seeking opportunities at the dynamic intersection of AI and semiconductor sectors, Broadcom’s 10-for-1 stock split represents an attractive avenue to consider based on sound fundamentals and strategic foresight.