In recent years, Wall Street has witnessed a dramatic rise in the popularity of stock-split stocks, especially in the technology sector. Although stock splits do not change the company's market value, they carry emotional significance.
Management usually chooses to split a stock when it believes that the company's share price is overstretched. Hence, post-split, the company's shares become more affordable and enable more investors to pick a stake in the stock. As the stock becomes more attractive to a larger investor base, there is usually a rise in overall trading activity. Frequently, this ultimately translates into an increase in the company's overall market capitalization -- at least in the short run.
Artificial Intelligence (AI) has emerged as the red-hot investment theme of 2023. Unsurprisingly, share prices of some AI stocks have grown through the roof. So, if you are searching for certain high-quality AI stocks that may benefit from a potential stock split, then you may consider picking small stakes in these two stocks.
1. Broadcom
A prominent semiconductor designer and enterprise software-solutions player, Broadcom's (AVGO 3.84%) share price has gained by nearly 105% so far in 2023 and has reached roughly $1,130, and management may now want to split this high-quality stock to make it more accessible for a broader investor base. A potentially more reasonable share price is not the only reason to like the stock; the company also boasts solid fundamentals and stellar financials.
Broadcom posted impressive financial performance in fiscal 2023 (ending Oct. 29). While the company's revenues grew year over year by only 8% to $35.8 billion, net income jumped by 22.5% year over year to $14.1 billion. The company's free cash flow (FCF) rose 8.1% year over year to $17.6 billion, translating into a solid FCF margin of 49%.
Broadcom has emerged as a major beneficiary of increasing demand for customized AI accelerators (e.g., Jericho3-AI, which enables high-performance connectivity between 32,000 GPUs) and ethernet-networking solutions from cloud-service providers that are upgrading data centers to handle AI workloads. Based on this trend, the company has guided for a 30% year-over-year increase in networking revenue for fiscal 2024.
Besides its prowess in customized accelerators and networking segments, Broadcom is also focusing on becoming a major player in the software segment. To that end, the company acquired VMware, a leading provider of virtualization-software technology that helps create private and hybrid cloud environments for large enterprises over shared hardware infrastructure. The company has guided for $12 billion of VMware revenues in fiscal 2024.
Meanwhile, Broadcom is trading at a price-to-sales (P/S) ratio of 14.2, which seems reasonable considering its prowess in networking solutions and infrastructure software, AI tailwinds, and an impressive cash-generating business model. Hence, this seems to be a compelling pick in 2024.
2. ServiceNow
Shares of leading IT management and business process-automation player, ServiceNow (NOW 1.02%), are up roughly 80% in 2023 and have reached a price of about $700. Management may consider splitting the stock to further enhance its attractiveness for small investors. However, there are also several other reasons to consider this stock now.
First, ServiceNow's Now Platform enables enterprises to streamline their technology, employee and customer experiences, and creator workflows. The company's focus on enabling clients to improve workforce efficiency and productivity has been a solid positive in 2023, especially since the year was marked by large enterprises aggressively cutting costs.
Second, the company's financial performance has been noteworthy in the third quarter of fiscal 2023 (ending Sept. 30). Subscription revenues were up 24.5% year over year to $2.2 billion. With subscription revenues accounting for almost 97% of the company's total revenues, ServiceNow boasts of high revenue visibility and the ability to rapidly grow revenues organically.
Third, ServiceNow has been very successful in developing a sticky customer base, as evidenced by its customer-renewal rate of 98% or more in the past five quarters. The company has a broad customer base of more than 7,700 enterprises around the world, which also includes 85% of the Fortune 500 companies. Multiple large customers have helped make ServiceNow's business resilient even in difficult times.
Fourth, ServiceNow's generative AI-driven platforms, such as Vancouver and Now Assist, are further helping clients improve workflow productivity. The company has also partnered with Nvidia to develop enterprise-grade generative AI technologies based on customized large language models (LLMs), trained on specifically tailored data, to ensure faster and smarter workflow automation.
ServiceNow is trading at a P/S ratio of 17.1, far greater than the median software-industry multiple of 2.2. However, considering the company's solid financials, sticky customer base, and generative AI capabilities, the premium valuation seems justified. Hence, investors can consider buying this stock now.
