Publicly traded companies routinely split their stocks. Walmart recently made news when it announced its plans to execute a 3-for-1 split, which will take its shares from $170 to under $60.
If Walmart is splitting its stock under $200, what does that mean for technology giant Broadcom (AVGO 3.84%), which trades at a hefty $1,200 per share today? Remarkably, the company has never split its stock.
Will that change?
What stock splits do (and don't do)
While stock splits are common and often cheered by investors, there can be some misunderstanding about what they are and how they impact the stock.
Suppose you want to buy shares of Broadcom, but can't afford the $1,200 price tag. Some brokerage platforms let you buy fractional shares, or "pieces" of a stock, but some don't. Besides, trying to save the money to buy one share of stock can be a bit discouraging for some. It might not feel like you own a meaningful piece of Broadcom's business.
That's one reason why companies split their stock. Ultimately, companies want investors to desire their stock, and having a sky-high share price can turn some investors away unnecessarily, especially those who don't have money to buy a handful of shares at $1,200 a pop. This sentiment can trickle through to company employees, too. A high share price can make it harder for employees to manage their equity in the company.
Stock splits lower the share price to make accumulating stock easier for investors and more liquid for employees. It can also make it easier for companies that provide employees with stock-based compensation to manage their accounting.
Regardless of its effect on investor sentiment, stock splits don't fundamentally change the stock's valuation. Suppose you have a cake you want to share with three friends. You cut it into four slices. As you're about to serve it, four more friends show up and want some cake. What do you do? You cut it some more to make eight slices. Did the actual cake get bigger? No, everyone just got a smaller slice.
That's basically how stock splits work.
Will Broadcom finally split its stock?
Nobody can know for sure whether Broadcom will take the step to split its stock. But there aren't that many stocks out there trading with share prices over $1,000 for a reason. The reason is exactly what I explained above: Investors tend to shy away from sky-high price tags.
Adding more fuel to this fire is the fact that Broadcom has been such an excellent investment in recent years. The business specializes in semiconductors for connective applications like networking, data centers, personal electronics, autonomous driving, and more. Semiconductor demand has increased as technology has advanced. First, it was the internet, then the cloud, and now, artificial intelligence (AI).
Look at Broadcom's eye-popping returns over just the past 10 years:
AVGO Total Return Price data by YCharts
Again, there are no promises, but splitting shares to make the price more digestible for interested retail investors and potentially continue this remarkable run makes a ton of sense.
Only time will tell what happens next.
A potential stock split is not the main reason to buy a stock
A stock split doesn't fundamentally change anything about the stock as an investment. You should purchase shares of Broadcom because you believe it's an awesome company and can continue creating value. Speaking of value, the company is now approaching a $600 billion market cap. Despite that, the stock can still do well over the long term. That's the reason to buy this stock.
The world is becoming increasingly digital, and the semiconductor outlook looks bright. According to research by McKinsey & Co., Broadcom and other semiconductor stocks are in the early innings of a golden decade. Growth in end markets like automotive, data, and wireless communications could add hundreds of billions of dollars, pushing the market to $1 trillion annually by 2030.
AVGO EPS LT Growth Estimates data by YCharts
Broadcom will surely see some of that upside, and the company's software investments seem to be working out. Analysts believe the company can grow earnings by an average of 14% annually over the long term. That's enough growth to create fantastic returns over time, even if the next decade isn't quite as prolific as the previous one.
The stock's valuation is a potential downside, a touch expensive at 26 times analysts' estimated 2024 earnings. It wouldn't hurt to wait for a pullback to buy shares, but the long-term direction of Broadcom seems positive, with or without a stock split.
