The bigger the stock split, the better the stock? If that were the case, Chipotle Mexican Grill (CMG 4.07%) would beat Broadcom (AVGO 2.82%) like a drum. Chipotle conducted a 50-for-1 stock split on June 25. Broadcom will split its shares 10-for-1 following the market close on July 12.
But the size of the stock split has no bearing on the quality of the stock. If you're thinking about whether or not to buy Chipotle or Broadcom, the decision should be an easy one. Here are five reasons Broadcom is a better stock-split stock to buy than Chipotle.
1. Better growth prospects
Chipotle's revenue rose 14% year over year in the first quarter of 2024. Its adjusted earnings per share jumped 27%. Unsurprisingly, its Chipotle stock has also performed quite well, vaulting nearly 30% higher so far this year.
NYSE: CMG
Key Data Points
Broadcom's revenue soared 43% year over year in its fiscal second quarter thanks in large part to the acquisition of VMware. The company's adjusted earnings per share increased 6%. What's more important, though, are Broadcom's growth prospects going forward.
VMware's contribution to Broadcom's total revenue should increase. Broadcom also has a huge growth opportunity with its artificial intelligence (AI) accelerators. The company looks for its networking revenue to increase 40% in 2024 primarily because of higher demand for AI systems.
Broadcom stock has skyrocketed more than 50% year to date. I think the semiconductor and software maker's growth prospects are a bigger factor behind this impressive return than its quarterly results.
NASDAQ: AVGO
Key Data Points
2. More attractive valuation
You might think Broadcom's valuation would be less attractive than Chipotle's after its greater gains. Instead, the opposite is true.
Chipotle's shares trade at a forward price-to-earnings ratio of 54.6. That's much higher than Broadcom's forward earnings multiple of nearly 29.2. Including expected growth makes Broadcom's valuation even more attractive. Chipotle's price-to-earnings-to-growth (PEG) ratio of 2.7 is more than twice Broadcom's PEG ratio of 1.3.
3. More profitable
Let's suppose that Broadcom and Chipotle had similar growth prospects and valuations. I'd still prefer Broadcom for one simple reason: It's more profitable than Chipotle.
In Chipotle's latest quarter, its net profit margin (using adjusted net income) was around 14%. That pales in comparison to Broadcom's fiscal Q2 adjusted net profit margin of more than 43%.
4. Stronger free cash flow
What's more important than profits? My answer is free cash flow. Profits can be manipulated relatively easily, but it's harder to finagle with free cash flow.
Chipotle generated free cash flow of nearly $995 million over the last 12 months. Broadcom's free cash flow during the same period topped $20 billion. Enough said.
5. The dividend
If all of the above isn't enough to convince you of Broadcom's superiority versus Chipotle, look at the two stocks' dividends (or lack thereof). Broadcom's forward dividend yield of 1.2% isn't all that juicy. However, Chipotle doesn't offer a dividend at all. Over time, even a relatively small dividend can boost total returns considerably.
