The growing demand for artificial intelligence (AI) has produced some massive stock gains for some companies and their investors. Several stocks have climbed so much in such a short period of time that management decided to split their shares.
While a stock split doesn't change the value of a company, it can make the stock more attractive to retail investors. Additionally, it can provide more precision for stock-based compensation packages, a common practice in the tech industry.
Recent high-profile stock splits in the AI industry include Nvidia and Lam Research, which both announced 10-for-1 stock splits earlier this year. But Broadcom (AVGO +1.41%), which recently underwent a 10-for-1 split, could be a better buy with the potential for its price to climb 67% within the next year, according to one Wall Street analyst.
Rosenblatt Securities slapped a $240 (split-adjusted) price target on the stock a few weeks ago. Here's why the analysts think the stock could climb 67% within a year.
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The other AI chipmaker
While Nvidia gets all the headlines about the demand for its GPUs to help train large language models, Broadcom has also seen soaring demand for its AI-related chips. The chip designer provides two types of chips that are extremely useful in data centers focused on generative AI. Combined, AI-related revenue increased 280% year over year in the second quarter.
Broadcom's networking chips help data centers get the most out of the equipment they buy. Big tech is spending billions every quarter on Nvidia GPUs. However, those clusters of GPUs require the efficient routing of data in order to maximize their processing power. Broadcom's chips ensure data gets to where it needs to go as quickly as possible so that there's minimal time wasted without GPUs crunching data. As data centers bring more and larger clusters online, demand for networking chips can grow exponentially, and that's exactly what we've seen.
Broadcom also develops AI accelerators. AI accelerators are custom chips designed specifically for training and running generative AI algorithms. Broadcom works with Alphabet's Google and other hyperscale cloud platforms on custom solutions. These chips have proven very cost-efficient alternatives to Nvidia's GPUs. For example, Apple used Google's Tensor Processing Unit designs to train its Apple Intelligence foundation models.
NASDAQ: AVGO
Key Data Points
Broadcom's management says cloud providers are accelerating their investments in accelerator designs. Not only does that mean more accelerator sales for Broadcom, but it should also support its networking chips. "Networking these AI accelerators is very challenging, but the technology does exist today in Broadcom," CEO Hock Tan told analysts during the company's second-quarter earnings call. In other words, when a customer uses its AI accelerator designs, it's also more likely to use its networking chips, too. That creates a strong cycle of growth for the business.
That trend is the primary reason Rosenblatt increased its Broadcom price target. But there's another reason as well.
AI chips are just one part of Broadcom's business
While AI chips might be the fastest-growing part of Broadcom's operations, it also has an excellent enterprise software business.
The most recent addition to its software solutions portfolio is VMWare, which the company acquired last year. It's since taken steps to transform the product into a simple subscription service. It's already signed 3,000 of its largest 10,000 customers to build self-service virtual private clouds, resulting in strong bookings growth. Management expects its annualized booking value to accelerate from $1.2 billion in the first quarter to reach a $4 billion quarterly run rate.
Importantly, the simplification of VMWare and the integration with its other software products and sales team should lead to strong synergies. Management has already incurred about $2 billion of restructuring costs related to the acquisition, but it's bringing down the costs of ongoing operations. Pre-acquisition VMWare had $2.3 billion in average quarterly operating expenses, management sees that falling to $1.3 billion by the end of the year by eliminating redundancies with its existing operations.
The improved synergies of the software segment with VMWare are another reason Rosenblatt is bullish on Broadcom. Ongoing progress in integrating VMWare should lead to strong margin expansion in the back half of the year.
Shares of Broadcom currently trade for a forward P/E of around 24. That's well below many other big AI companies. What's more, the company is well-positioned to support that valuation with strong earnings-per-share growth over the next few years from AI chip sales and improving software margin. While the stock might not climb another 67% from here by mid-year next year, it certainly looks like a good stock to buy at its current price.
