Broadcom Stock Split: Primed for Continued Growth?
Broadcom (NASDAQ: AVGO) has been on a tear. Investor enthusiasm for the company’s custom silicon solutions powering artificial intelligence workloads has driven its share price up 106% in the past year. To make the stock more accessible to a wider range of investors, Broadcom will execute a 10-for-1 stock split on July 12th. This means shareholders will receive nine additional shares for each one they already own. The stock will begin trading on a split-adjusted basis on July 15th.
But the question remains: will Broadcom’s share price continue to climb after the split? Historical data suggests a positive outlook.
Looking Back: Stock Splits and Outperformance
While Broadcom itself has never undergone a stock split (the current company resulted from the 2016 acquisition of Broadcom by Avago), we can analyse the performance of other companies following splits to glean insights. Research from Bank of America indicates a strong correlation between stock splits and outperformance relative to the S&P 500. Since 1980, companies have seen an average share price appreciation of 25.4% in the 12 months following a stock split announcement, compared to the S&P 500’s average gain of 11.9% during the same period. Even within a shorter timeframe (since 2010), stock-split stocks have delivered an average gain of 18.3% over the following year, compared to 13.3% for the S&P 500.
Applying this historical trend to Broadcom, we could expect a potential return of 18% to 25% within the next year following the split announcement in June. This translates to an upside of 2% to 9% by June 2025, considering the stock’s already impressive 16% rise since the announcement. However, it’s crucial to remember that past performance is not a guarantee of future results. Investors should delve deeper into the company’s fundamentals before making any investment decisions.
Broadcom: A Leader in Custom AI Chips
Broadcom operates in two primary segments: semiconductor solutions and infrastructure software. The semiconductor segment encompasses chips for data centres, storage systems, and networking platforms. Meanwhile, the infrastructure software segment offers solutions for endpoint security, mainframe observability, and server virtualisation.
Broadcom is a dominant player in the networking chip market, holding an estimated 80% market share according to JPMorgan Chase. Major data centre switch and router vendors like Cisco Systems and Arista Networks rely heavily on Broadcom’s technology. Beyond networking, Broadcom is also a leader in application-specific integrated circuits (ASICs), custom-designed silicon for specialised applications like AI. Notably, Broadcom collaborates with Alphabet’s Google on designing custom machine learning accelerators called tensor processing units (TPUs).
Broadcom’s acquisition of VMware last year solidified its position as a leader in virtualisation software. Virtualisation technology partitions physical hardware into multiple virtual systems, promoting cost savings and improved efficiency. By dividing a single physical server into multiple virtual servers, companies can run various operating systems and applications simultaneously, maximising server utilisation.
Strong Financials and AI Tailwinds
Broadcom’s financial performance has been impressive. The company reported strong results in the second quarter of fiscal 2024 (ending May 2024), exceeding analyst expectations on both revenue and net income. Revenue grew a significant 43% to $12.5 billion, while non-GAAP net income rose 20% to $5.4 billion.
CEO Hock Tan attributed the positive results to surging demand for AI products and the successful integration of VMware. “Revenue from AI products reached a record $3.1 billion during the quarter,” Tan stated. “There’s also been accelerated adoption of the VMware software stack by enterprises building their private clouds, propelling infrastructure software revenue.”
