Artificial intelligence (AI) has driven the revenue and stock price growth of many technology companies recently. Investors are piling into these players who are cashing in on the AI boom now and could have even more to gain down the road. After all, analysts predict that today’s $200 billion artificial intelligence market could surpass $1 trillion by the end of the decade.
Broadcom (NASDAQ: AVGO) is one of the players benefiting from the move. The semiconductor and networking giant has seen demand pick up, and that has helped its share price rise more than 60% since the start of the year. But Broadcom just announced a move that will soon bring its high-flying stock down to Earth. The tech company is planning a stock split next month, an operation that will lower its share price from more than $1,800 today to around $180.
Now the question is: Should you buy Broadcom now or wait to get into this AI player after the stock split? Let’s find out.
Why Broadcom is a good buy
First, a little background on Broadcom itself and why the company overall is a good buy. Broadcom makes a wide range of semiconductor software and infrastructure products — in fact, the company makes thousands of products used in fields ranging from data center servers to smartphones. More than 99% of Internet traffic travels through Broadcom technology, a statistic that shows this company’s leading role in the fields of networking and connectivity. Further expanding its revenue opportunity, Broadcom recently completed the acquisition of cloud computing software company VMware.
In the latest quarter, Broadcom reported a 43% increase in revenue to more than $12 billion. And AI revenue, driven by demand for AI networks and custom accelerators, rose 280% to $3.1 billion. During the quarter, Broadcom doubled the number of switches it sold, and the company is developing next-generation switches, optics and other tools that will support the needs of AI data center networks in the coming years.
Broadcom has a positive track record, growing revenue and profit in the billions of dollars over the years. And this year, thanks to VMware integration and demand for AI, the company raised its full-year revenue forecast to $51 billion — representing a 42% increase from last year’s revenue level.
All about the Broadcom stock split
So Broadcom is a buy — but should you get into the stock today or after the split? A stock split is a mechanical move to lower the price of each individual share by issuing more shares to current owners, but does not change the company’s total market value or share valuation. Broadcom is planning a 10-for-1 stock split, so if you own one share, you’ll get an extra nine after the market closes on July 12. The stock will begin trading at the split-adjusted price on July 15.
Broadcom may actually be more expensive after the split if the stock continues to rise. It has already advanced about 20% since the company announced the operation, and that has pushed its valuation higher. Today, Broadcom trades for 37 times earnings estimates, up from levels of around 25 earlier this year. But considering Broadcom’s AI growth and contributions from VMware, the price still looks very reasonable at current levels.
Of course, it is impossible to predict the daily movements of stocks. Broadcom could also fall right now through the stock split and end up trading at a lower valuation after the split.
So what should you do? Keep in mind that, when investing for the long term, short-term price movements won’t affect your returns much. A 20% gain or loss over the next two weeks won’t matter if the stock delivers growth over the next five to 10 years.
It’s true that if you have, say, $200 to invest in Broadcom, buying post-split might be easier because you’ll be buying a whole share rather than investing in fractions—especially if the brokerage Yours does not offer fractional shares. But if your budget is equal to the price of a full stock right now or more, there’s no reason to wait for the split to get into this high AI stock. Make a great purchase today.
Should you invest $1,000 in Broadcom right now?
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Adria Cimino has no position in any of the mentioned shares. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Should you buy Broadcom now — or after the stock split? was originally published by The Motley Fool