Finding the next stock-split candidate can offer investors good potential as these stocks often pop on news of an upcoming stock split. While there's no way to know for certain if a company will split its stock until it makes an announcement, one place to look are stocks with high prices.
One such company right now is Broadcom (AVGO -0.50%), a semiconductor giant deeply involved with artificial intelligence (AI). The stock currently trades for around $830, and Broadcom has never split its stock in its current business configuration. So could that finally be on the horizon? Let's take a look.
AI should boost Broadcom's business
Stock-split stocks are often successful because the business is already moving in the right direction. A stock typically requires a high price for a split, and there's only one reason that happens: the company is doing well.
Broadcom checks that box as its business is doing quite well. It has two segments: semiconductor solutions and infrastructure software. Its semiconductor solutions business make up over three-quarters of its total revenue and includes products like the chips used in iPhones to connect to mobile networks and the Jericho3-AI chip, which is used in AI workloads.
The software business focuses on mainframe products used to run massive data centers or other centralized computing centers.
While the company has seen its revenue growth slow thanks to a slowdown in many parts of the economy, it is still growing at about a 5% clip.
But what has many investors excited about Broadcom is its AI aspirations. After Nvidia reported massive demand for its AI GPUs, Broadcom's stock moved upward in sympathy. That's because its chips and software products control the data centers alongside the GPUs. As a result, Broadcom's stock has had a banner year, up nearly 50% in 2023.
Still, this year isn't without its bumps in the road. A report claimed that Alphabet was considering replacing Broadcom as its tensor processing unit (TPU) supplier by 2027 to save billions on costs. Alphabet denied the claim, but it shows Broadcom isn't in an untouchable position.
Regardless, 2024 should be a massive year for Broadcom as management believes AI-chip-related revenue will increase from 15% of semiconductor revenue to over 25%. This potential has some investors excited.
Broadcom hasn't been growing as quickly lately
Despite Broadcom's stock performance this year, it doesn't have a massive premium attached to it. At just 26 times trailing earnings and 20 times forward earnings, it's attractively priced.
AVGO PE Ratio data by YCharts
Furthermore, Broadcom shares pay investors a generous 2.2% dividend -- a nice touch on an attractive stock. And it has plenty of room to grow it further since its payout ratio sits at around 55%.
Revenue growth in its third quarter (ended July 30) may not have been anything to celebrate -- up 5% -- and earnings per share rose 8%. As Broadcom reaches a more mature business stage, investors shouldn't expect it to put up massive growth figures. But with its disciplined share repurchase program plus a growing dividend, it still has the potential to beat the market.
So regardless of whether Broadcom decides to do a stock split or not, I see no reason to wait. Broadcom makes an excellent anchor position in your portfolio to balance out some high-flying stocks, and investors looking for stability should consider it.
