Similar to the planets aligning, a unique event has been unfolding on Wall Street in recent weeks. Namely, we've witnessed two of the hottest go-to trends intersecting: artificial intelligence (AI) and stocks enacting splits.
Stock splits are conducted by publicly traded companies as a superficial means to alter their share price and outstanding share count. A stock split has no impact on a company's market value or its operating performance.
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The two variations of stock splits that companies announce are known as "forward" and "reverse." With forward splits, a company is angling to make its shares more nominally affordable for everyday investors. Meanwhile, reverse-stock splits are designed to increase a company's share price, often with the idea of ensuring it meets the minimum listing standards of a major stock exchange.
Most investors tend to focus on forward-stock splits, because companies conducting forward splits have a reputation for out-innovating and out-executing their competition over the long run.
Meanwhile, artificial intelligence is being viewed as the hottest innovation since the proliferation of the internet to mainstream life three decades ago. According to the researchers at PwC, AI can add an estimated $15.7 trillion to the global economy by 2030. Professional and everyday investors simply aren't going to overlook numbers this large, even if businesses are still in the early stages of figuring out how to utilize the technology to grow their sales and profits.
While semiconductor giant Nvidia (NVDA +0.10%) has been the most direct beneficiary of the AI revolution, another AI company is about to steal its stock-split spotlight (say that three times fast!).
NASDAQ: NVDA
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Nvidia makes waves by completing a 10-for-1 forward split
On May 22, Nvidia joined an exclusive club of a little more than a half-dozen top-notch businesses that have announced and/or completed stock splits in 2024. The company's board announced a 10-for-1 stock split designed to increase its outstanding shares by a factor of 10 and reduce its share price to 1/10th of what it had been trading at. This split became effective after the closing bell on June 7.
Nvidia's stock split, which reduced its share price to around $120, has made it easier than ever for retail investors to be part of the rise of AI.
What's driven Nvidia's valuation higher by $2.7 trillion since the start of 2023 is its suite of AI-accelerating graphics processing units (GPUs). Based on the 3.76 million data center GPUs Nvidia shipped in 2023, per TechInsights, the company accounted for a monopoly esque 98% share of AI-GPUs deployed in high-compute data centers.
In addition to being the go-to source for businesses wanting to train large language models and oversee generative AI solutions, Nvidia counts America's top businesses as its leading customers. Microsoft, Meta Platforms, Amazon, and Alphabet collectively contribute to around 40% of its net sales. In fact, Meta has been increasing its capital expenditures forecast to support its AI ambitions.
Nvidia is also benefiting from AI-GPU demand completely swamping supply. The laws of economics suggest that if the demand for a good or service overwhelms its supply, the price of that good or service will rise until demand begins to taper. Nvidia has meaningfully increased the cost for its world-leading chips, which led to a better-than-quintupling in Data Center revenue during the fiscal first quarter (ended April 28). As a result, its gross margin surged to 78.4%!
However, Nvidia's time in the spotlight as Wall Street's Ai stock-split stock is over.
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Say hello to Wall Street's newest stock-split stock
Following the closing bell on June 12, semiconductor solutions giant Broadcom (AVGO +4.89%) lifted the hood on its fiscal second-quarter operating results (ended May 5, 2024). While a lot of focus was, rightly, on its operating performance, perhaps the biggest takeaway was the 10-for-1 forward split approved by Broadcom's board of directors.
Prior to being acquired by Avago Technologies in 2016 (Avago chose to keep the Broadcom name), the "old" Broadcom had conducted three stock splits. However, Avago has never enacted a split. Thus, when this split becomes effective on July 15, it'll be a first for the combined entity.
The tea leaves absolutely suggested a split was in order. Based on after-hours trading activity on June 12, a single share of Broadcom was setting investors back by more than $1,710. Once this stock split takes effect, investors would only have to set aside $171 (assuming no movement in its stock) to purchase one share.
Broadcom really made a name for itself in the AI arena last year when it unveiled its Jericho3- AI chip. Jericho3 is capable of connecting up to 32,000 AI-GPUs in high-compute data centers. The ability to reduce tail latency and expedite the decision-making and computational processes involved in AI-accelerated data centers is what Broadcom's AI solutions are all about.
NASDAQ: AVGO
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Broadcom also has some high-profile AI networking partners. In particular, the company partnered with Alphabet last year to embed Google Cloud's generative AI solutions into Symantec's Security platform (Symantec is a subsidiary of Broadcom).
This is a good time to mention that Broadcom does far more than just develop AI solutions. It generates a substantial portion of its revenue from selling wireless chips and accessories used in next-generation smartphones. Though smartphones aren't the growth trend AI is, the 5G rollout is encouraging a steady device replacement cycle. This should provide plenty of sales backlog and operating cash flow for Broadcom.
Additionally, Broadcom has ample opportunity in other segments that include security solutions, as well as connectivity and sensor solutions for industrial equipment and next-gen vehicles.
Even after the massive run-up its stock has enjoyed, Broadcom can still be purchased for less than 30 times forward-year earnings. While I do believe a short-term pullback will take shape (no stock goes straight up), a reasonable argument can be made that Broadcom's stock can eventually head even higher.
