Some companies create so much value over the long term that their stock price soars into the hundreds or even thousands of dollars, which makes it difficult for everyday investors to buy one full share. Those companies will often execute a stock split, which works by increasing the number of shares in circulation and reducing the price per share by a proportional amount.
For example, a 3-for-1 stock split would increase a company's shares in circulation threefold, while reducing its price per share by two-thirds. The value of the company remains the same, but it gives investors the opportunity to buy in with a smaller outlay.
Nvidia, Amazon, and Tesla are among the most notable companies to execute stock splits in the past few years. I think Broadcom (AVGO 3.84%) could join them in 2024. Its stock is up 345% over the last five years, and it now costs more than $1,200 to buy a single share.
Broadcom will likely continue to create value in the future, so here's why it would benefit from a split.
Broadcom's AI pedigree spans multiple industries
Broadcom was founded in 1991, and it's responsible for a number of innovations in the semiconductor and electronics industries. However, the company would be considered rather boring in today's technology climate if not for its merger with chip giant Avago Technologies in 2016. That merger marked the beginning of an acquisition frenzy.
The new-look Broadcom proceeded to buy semiconductor device supplier CA Technologies in 2018 for $18.9 billion, and cybersecurity powerhouse Symantec in 2019 for $10.7 billion. But those deals were dwarfed by Broadcom's whopping $69 billion acquisition of cloud software developer VMware in 2023.
VMware develops critical cloud software that is layered on top of data center infrastructure. It enables customers to create virtual machines to optimize their computing power -- for example, one user with one server might only occupy a fraction of its capacity, but virtual machines can split that server capacity across multiple users to utilize its full power. In the age of artificial intelligence (AI) where businesses are scrambling to access as much computing capacity as possible, optimization tools are essential.
Last year VMware expanded its deal with Nvidia to create the VMware Private AI Foundation. It's a fully integrated solution allowing VMware's customers to access and customize the latest AI models, accelerating their development of generative AI applications.
But Broadcom played a role in AI long before it acquired VMware. For example, its Tomahawk 5 high-bandwidth data center switch is designed to accelerate AI workloads. A switch determines how quickly data travels from one point to another, so it's an important piece of hardware in modern data centers where developers are using thousands of graphics processing units (GPUs).
Plus even Symantec is using generative AI to empower customers to find, analyze, and neutralize cyber threats more quickly.
Broadcom is off to a hot start to 2024
Broadcom generated a record-high $35.8 billion in revenue during 2023, marking an 8% increase compared to 2022. It was a relatively modest growth rate, but thanks to the inclusion of VMware's financials beginning in 2024, its revenue for the first quarter (ended Feb. 4) jumped 34% year over year.
Broadcom's guidance suggests its revenue for the whole of 2024 will come in at $50 billion, which would be a whopping 40% year-over-year increase.
Besides the contribution to growth, VMware also helps Broadcom diversify its revenue base. Investors have long been concerned because 20% of Broadcom's revenue is derived from Apple, which is working on its own chip hardware and could eventually abandon the company.
That isn't a risk in the short term, because a new multiyear deal was struck in 2023 that will require Broadcom to continue developing wireless connectivity and 5G radio frequency components for Apple. However, if and when Apple does eventually move away from Broadcom, investors will rest far more easily knowing the company can fall back on revenue drivers like VMware.
Image source: Getty Images.
Broadcom stock could move higher, making a split more likely
A stock split alone is never a good reason to buy a stake in any company. It has no bearing on valuation, although it can potentially broaden the investor base by attracting new shareholders. That sometimes dilutes the voting power of hedge funds and institutions, which is a positive for most companies.
With that being said, the main reason to buy Broadcom stock is because it's cheap. The company generated $42.25 in non-GAAP earnings per share last year, and based on its current stock price of $1,293 it trades at a price to earnings (P/E) ratio of 30.6. That's a modest discount to the 32.9 P/E ratio of the Nasdaq-100 technology index -- but it gets better.
Wall Street predicts Broadcom's earnings will rise to $46.47 in 2024, placing its stock at a forward P/E ratio of 27.8. The Street's early forecast for 2025 points to $56.82 in earnings, which translates to a forward P/E of 22.7.
In other words, if Broadcom maintains its current P/E of 30.5, its stock could be trading at $1,738 in 2025, which will take it even further out of reach for small investors. Employees who want to buy the stock to participate in the company's success might also find it difficult.
I think Broadcom would benefit from executing a 10-for-1 split this year, which would reduce its current stock price to $129, placing it in line with its peers in the tech sector, including Tesla, Amazon, and Nvidia. It would give many more investors an opportunity to buy into this AI growth story.
