Does it feel like you’ve been here before? Semiconductor and software giant Broadcom(NASDAQ: AVGO) executed a 10-for-1 stock split during the summer. Yet, here I am waving the flag for another potential stock split.
Maybe that’s a good thing. Broadcom stock has soared nearly 30% since its last split, though most of that has come in just the past few weeks.
Does it make sense to split again? After all, stock splits don’t make a stock fundamentally cheaper; they lower the share price by proportionately increasing the total share count.
So, should investors expect Broadcom to announce another stock split soon?
Most companies split their stock to make trading easier for smaller investors and employees. Investors can accumulate shares in the company without needing deep pockets. Meanwhile, employees sitting on significant gains on shares they’ve been given as compensation appreciate having more control over how much they cash in at a time.
There aren’t any rules about why or how often a company can split its stock. Broadcom wouldn’t even be the first company to split its stock multiple times in a short period. Tesla executed two stock splits in the two years between August 2020 and 2022. Each share investors owned before those splits would equate to 15 shares today.
Admittedly, Tesla’s splits were about two years apart, and Broadcom’s recent split was only five months ago. I wouldn’t say the odds are super high that Broadcom will split its stock in the next month or two. However, I think there’s a strong chance of another split in the next few years.
Broadcom recently announced exciting developments regarding its artificial intelligence (AI) opportunities when it reported Q4 earnings for its fiscal year 2024 (ended Nov. 3). Broadcom is developing XPU (extreme processing unit) AI chips for three large customers, with another two in the works. Management wouldn’t drop names, but OpenAI and Apple are reportedly among them.
These XPU chips are reportedly being used for AI inference, helping AI models effectively apply their trained intelligence to new data it hasn’t seen before. You could think of AI training as achieving intelligence and AI inference as using it. It’s a different application than training the AI models, which Nvidia has dominated with its accelerator chips. According to the company’s most recent conference call, Broadcom’s management believes its AI-related revenue opportunity will hit $60 billion to $90 billion by 2027 and the company is poised to capture much of it.
That’s a big deal because Broadcom’s AI revenue for the full fiscal year 2024 was $12.2 billion, a fraction of that. Company-wide revenue was $51.5 billion, so AI is a growth catalyst that could lead to Broadcom doubling its revenue during the next five to 10 years.
Nobody can know at what price Broadcom would consider splitting again, but logically, the higher the stock goes, the higher the odds. Broadcom traded at more than $1,000 per share when it split in July. The stock isn’t close to that today, but it crept up to more than $250 at one point.
The stock trades at a price-to-earnings-growth (PEG) ratio of about 2, which is reasonable for a high-quality company like Broadcom. In other words, Broadcom’s price-to-earnings ratio is appropriate for its expected earnings growth, which analysts estimate will average almost 18% during the next three to five years. Given the recent AI updates, growth estimates may increase in the coming months. Higher growth expectations and a reasonable valuation could mean higher share prices.
If Broadcom gets to $350 to $400 per share, it might put a stock split on the table. The next split might be less dramatic than the last one, such as 4-for-1 or 2-for-1. Remember, stock splits shouldn’t be the reason you buy a stock because they don’t affect the per-share financials or increase a company’s market value.
Broadcom’s long-term AI upside makes it a compelling investment, so consider a potential stock split a bonus.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Tesla. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
