News

Broadcom (NASDAQ: AVGO) shares surged 106% during the past year as investors came to appreciate the role its custom silicon could play in powering artificial intelligence workloads.

The company will reset its share price with a 10-for-1 stock split on Friday, July 12, meaning shareholders of record will receive nine additional shares for each one they already own. The stock will begin trading on a split-adjusted basis on Monday, July 15.

Will Broadcom shares continuing soaring after the stock split? History says the answer is yes.

History says Broadcom stock is headed higher

Broadcom was acquired by Avago in 2016. The combined entity, which retained the name Broadcom, has never split its stock. So there is no historical data specific to Broadcom. However, we can still make an educated guess about its future performance by examining how other stocks have performed following a split.

Research from Bank of America indicates that stock-split stocks tend to outperform the S&P 500. Specifically, since 1980, companies have seen average share price appreciation of 25.4% during the 12 months following a stock split announcement. Meanwhile, the S&P 500 gained an average of 11.9% during the same period.

If we narrow the time horizon, stock-split stocks have still beat the S&P 500, but to a lesser degree. Since 2010, companies have seen average share price appreciation of 18.3% during the 12 months following a stock split announcement. Meanwhile, the S&P 500 gained an average of 13.3% during the same period.

In short, history says Broadcom could return 18% to 25% during the 12-month period following its stock split announcement, which took place on June 12. Shares have since advanced 16%, leaving implied upside between 2% and 9% through June 2025. That said, past performance is never a guarantee of future returns, and investors cannot make an educated decision without first understanding the business.

Broadcom is a leader in custom AI chips

Broadcom breaks its business into semiconductor solutions and infrastructure software. The former segment includes chips for data center servers, storage systems, and networking platforms. The latter segment includes software for endpoint security, mainframe observability, and server virtualization.

Broadcom holds about 80% market share in networking chips, according to JPMorgan Chase. Its clients include Cisco Systems and Arista Networks, the leading vendors of data center switches and routers. Broadcom is also the leading provider of application specific integrated circuits, bespoke silicon built for specialized use cases like artificial intelligence (AI). For instance, Broadcom helps Alphabet's Google design custom machine learning accelerators called tensor processing units.

Additionally, Broadcom became the leader in virtualization software when it acquired VMware last year. Virtualization divides physical hardware into multiple virtual systems to reduce costs and improve efficiency. Physical servers usually operate at a fraction of their capacity because they are limited to a single operating system and often dedicated to a specific application. But a single physical server divided into multiple virtual servers can run several operating systems and applications simultaneously.

Broadcom reported encouraging financial results in the second quarter of fiscal 2024 (which ended in May 2024), beating expectations on the top and bottom lines. Revenue increased 43% to $12.5 billion and non-GAAP net income rose 20% to $5.4 billion.

CEO Hock Tan said demand for AI products and VMware were the driving forces behind its second-quarter results. "Revenue from our AI products was a record $3.1 billion during the quarter. Infrastructure software revenue accelerated as more enterprises adopted the VMware software stack to build their own private clouds."

Broadcom shares trade at a tolerable valuation

In a note to clients, Ben Reitzes at Melius Research recently wrote, "Broadcom is one of the must-own AI stocks because of its leadership as a fabless semiconductor provider across many categories." He specifically mentioned its strong presence in networking chips and AI accelerators.

Wall Street expects Broadcom to grow adjusted earnings per share at 24% annually through fiscal 2025 (which ends in October 2025). That estimate makes its current valuation of 40 times adjusted earnings look tolerable. Personally, I would not classify Broadcom as a "must-own" stock, but patient investors should certainly consider buying a position today.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Arista Networks. The Motley Fool has positions in and recommends Alphabet, Arista Networks, Bank of America, Cisco Systems, and JPMorgan Chase. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.