Stock splits have become a popular maneuver among some of the world's largest technology companies to keep their stock prices accessible to their employees and small investors. Amazon, Alphabet, Nvidia, and Tesla are just some of the names that have enacted stock splits in the past few years alone.
Simply put, when a company creates substantial amounts of value, investors sometimes need to fork out hundreds, or even thousands of dollars to buy a single share. While some brokers offer fractional shares, many investors prefer the idea of owning one full slice of a particular company.
A stock split works by increasing the amount of shares in circulation, which shrinks the price per share by a proportional amount. A 3-for-1 split would increase a company's share float by 3 times, while reducing the share price by two-thirds. The value of the company remains exactly the same, but the cosmetic reduction in its stock price allows investors to buy with a much smaller outlay.
With that in mind, I think Broadcom (AVGO +4.27%) is a top candidate to execute a stock split in 2024. The company has soared in value by some 450% in the past five years, and it now costs an eye-watering $1,200 or so to purchase a single share. Broadcom is likely to create even more value going forward, and here's why it will benefit from a split.
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Semiconductors, cybersecurity, cloud software, AI, and more
Broadcom was founded in 1991, and it's responsible for a number of computing hardware innovations like the optical mouse sensor, transceivers for wireless data exchange, and a range of semiconductor chips. The business came public in 2009, but it was transformed in 2016 when it merged with semiconductor giant Avago Technologies. The joint companies retained the Broadcom name, but they've charted a new path forward together.
The new Broadcom has since completed a string of large acquisitions. It bought semiconductor device supplier CA Technologies for $18.9 billion in 2018, followed by the purchase of cybersecurity giant Symantec for $10.7 billion in 2019. But its largest deal came last year, when it spent $69 billion to acquire cloud computing software company VMware.
Broadcom is now considered a leader in networking and server connectivity solutions for high-performance computing, specifically in the data center. Its latest Tomahawk 5 is a high-bandwidth switch designed to accelerate artificial intelligence (AI) and machine learning workloads. These chips determine how quickly data travels from one point to another, and when developers are training AI models using thousands of powerful GPUs, that's a major component of the equation.
VMware is a critical piece of software that is layered on top of data center infrastructure, allowing customers to maximize their computing power. For example, one user with one server might only be harnessing 10% of its capacity, but VMware sets up virtual machines so multiple users can plug into that infrastructure to utilize 100% of its processing power. Given the sheer demand for AI-capable computing, optimization is absolutely crucial.
But Broadcom's presence in AI continues to expand. Even Symantec is using generative AI to combat increasingly sophisticated cyberthreats with the help of a new partnership with Google Cloud's Vertex AI platform. It's empowering customers to find, analyze, and eliminate threats much more quickly and with greater accuracy.
Strong gains are underpinned by financial success
The significant rise in Broadcom stock over the past few years is supported by strong financial results. The company recently reported its full-year figures for fiscal 2023 (ended Oct. 29), and it delivered a record-high $35.8 billion in revenue.
That number has grown at a compound annual rate of 12.2% since fiscal 2019. While it sounds relatively modest compared to other leading AI companies, Broadcom is forecasting $50 billion in revenue for fiscal 2024, which would represent 40% growth -- a seismic acceleration, partly because the company will begin recognizing VMware's revenue as its own.
One persistent concern with Broadcom is that 20% of its revenue comes from just one customer: Apple. The iPhone maker is investing heavily in developing its own chips and computing hardware, so many analysts have feared Apple could eventually pull the pin on its ties to Broadcom.
However, in May of last year, Apple announced it will commission Broadcom's services for several more years to develop 5G radio frequency components and wireless connectivity components. That should ease any jitters among investors, at least in the short term.
Plus, Broadcom's revenue base is quickly becoming more diverse, especially thanks to the VMware acquisition. In fiscal 2024, Apple's contribution to Broadcom's revenue should look much smaller as a percentage of the company's total sales.
NASDAQ: AVGO
Key Data Points
The stock could see more upside, paving the way for a split
Broadcom generated $42.25 in non-GAAP earnings per share (profit) in fiscal 2023, and based on its stock price of $1,211, it trades at a price-to-earnings (P/E) ratio of 28.6. That puts Broadcom at a discount to the Nasdaq-100 technology index, which sports a P/E of 30.3. In other words, Broadcom is cheaper than the average P/E valuation of its peers in the tech sector.
Broadcom stock looks even less expensive on a forward basis, because Wall Street is forecasting $46.52 in earnings per share in fiscal 2024, followed by $55.53 in fiscal 2025. That gives the stock forward P/E ratios of 26 and 21.8, respectively. It implies Broadcom shares will have to rise considerably over the next two years just to maintain today's P/E ratio.
That's why I think this company is a prime candidate for a stock split in 2024. A 10-for-1 split would shrink its stock price to $121.12 by increasing the number of shares in circulation tenfold. That would put its stock price in line with other tech giants like Amazon, Alphabet, Apple, and Tesla.
By making the stock more accessible to small investors, Broadcom can reduce the concentration of voting power among hedge funds, mutual funds, and institutions, so the split would also benefit the company.
A potential stock split alone isn't a reason to buy Broadcom. Investors should consider owning shares for all of the positives relating to its business that I discussed above. However, a split would certainly make it easier to buy a slice of this fast-growing success story.
