UBS analysts estimate that artificial intelligence (AI) spending will approach $1.2 trillion annually by 2027. Semiconductor companies Nvidia (NVDA 1.86%) and Broadcom (AVGO +0.01%) have already benefited from that opportunity, and enthusiasm about their ability to monetize AI has driven both stocks higher.
Since November 2022, shares of Nvidia and Broadcom have advanced 765% and 300%, respectively. That period coincides with the existence of ChatGPT, the generative AI application that sparked the spending boom forecasted by UBS.
Both semiconductor companies recently completed a 10-for-1 stock split, the purpose of which was to make shares more affordable. Historically speaking, stock splits have been good news for shareholders. Here's why.
Image source: Getty Images.
History says Nvidia and Broadcom shares will move higher by mid-2025
In hindsight, good investments often share two qualities: The companies in question have a competitive advantage and compelling growth prospects. In some cases, those qualities lead to share-price appreciation so significant that a company splits its stock. That rarely happens by accident to poor or mediocre companies. In that sense, stock splits can be roundabout indicators of worthwhile investments.
Research from Bank of America supports that conclusion. Companies tend to outperform the S&P 500 (^GSPC +0.37%) during the year following a stock-split announcement, according to analysts at the investment bank. "Historically, stocks have notched 25% total returns in the 12 months after a split is announced, compared to 12% for the broad index."
We can apply that information to Nvidia and Broadcom to make an educated guess about their future performance.
- Nvidia announced its 10-for-1 stock split after market close on May 22, 2024. Its share price has increased 16% since the opening bell on the following day, leaving implied upside of 9% through May 2025.
- Broadcom announced its 10-for-1 stock split after market close on June 12, 2024. Shares have declined 9% since the opening bell on the following day, leaving implied upside of 34% through June 2025.
Past performance is never a guarantee of future results, but history says there are more gains in store for Nvidia and Broadcom shareholders in the coming months. Coincidentally, Wall Street analysts have come to a similar conclusion. Nvidia's median 12-month price target of $132 per share implies 13% upside from its current share price of $118. And Broadcom's median 12-month price target of $200 per share implies 28% upside from its current share price of $156.
Of course, relying too heavily on predictions and price targets is dangerous. Warren Buffett once wrote, "Short-term market forecasts are poison and should be kept locked up in a safe place." Rather than guessing at how Nvidia and Broadcom will perform in the near term, investors should focus on fundamentals like financial results and valuations.
NASDAQ: NVDA
Key Data Points
Nvidia is the market leader in artificial intelligence chips
Nvidia graphics processing units (GPUs) are the industry standard in artificial intelligence (AI) infrastructure. The company accounted for 98% of data-center GPU sales last year, and it holds at least 80% market share in AI chips, according to analysts.
The company has reinforced its dominance by expanding into other hardware categories like central processing units (CPUs) and networking equipment, as well as software and services that streamline the development of AI applications. Jim Kelleher at Argus recently wrote, "In our view, Nvidia stands out because it participates in so many parts of the AI economy."
Nvidia reported better-than-expected financial results in the first quarter. Revenue surged 262% to $26 billion on strong demand for AI hardware, and non-GAAP net income increased 462% to $15.2 billion. Triple-digit growth will persist forever, but AI spending across hardware, software, and services is forecasted to increase at 37% annually through 2030, and Nvidia should continue to benefit.
Wall Street analysts expect Nvidia to grow adjusted earnings per share at 38% annually through fiscal 2027 (ends January 2027). That consensus estimate makes the current valuation of 65.6 times adjusted earnings look tolerable. Predicting short-term movements following the stock split is impossible, but I believe Nvidia can beat the S&P 500 over the next three to five years.
NASDAQ: AVGO
Key Data Points
Broadcom is the market leader in custom silicon and networking chips
Broadcom provides a broad range of semiconductor solutions and infrastructure software. But the company is best known for its dominance in data-center networking chips. Harlan Sur at JPMorgan Chase estimates its market share at 80%.
Broadcom also dominates the market for high-end, application-specific integrated circuits (ASICs), specialized silicon built for complex workloads like AI. Currently, Broadcom co-designs custom machine learning chips with Alphabet's Google and Meta Platforms, but the company recently landed a third customer that could be Amazon or Apple, according to William Stein at Truist Securities.
Broadcom reported strong financial results in the second quarter. Revenue increased 43% to $12.5 billion on record AI product sales, and non-GAAP net income rose 20% to $5.4 billion. The company is well positioned for future growth given that demand for AI chips should be a tailwind for its networking and custom-silicon businesses.
Indeed, Goldman Sachs analysts recently wrote, "Alongside Nvidia, we view Broadcom as a critical piece to the ongoing AI infrastructure build-out." Bank of America analysts expressed a similar opinion, calling Broadcom a "top AI pick" due to strength in ASICs and networking chips.
Wall Street expects Broadcom to grow adjusted earnings per share at 21% annually through fiscal 2026 (ends October 2026). That consensus estimate makes the current valuation of 35.9 times adjusted earnings look tolerable. Patient investors should consider buying a position in Broadcom today, provided they plan to hold the stock for at least three to five years.
