AVGO Alert: Why the 10-1 Broadcom Stock Split Could Ignite a Tech Buying Frenzy

Stocks to buy

In less than two weeks, Broadcom (NASDAQ:AVGO) will split its stock by a 10-to-1 ratio. Shares that currently trade for more than $1,600 each will each be worth about $160 a stub. 

A stock split changes nothing about a company. An investor could either buy Broadcom stock before or after the division and he would still own the same company. 

Yet splits are often viewed by the stock market favorably. They signal management believes additional growth and profits are coming.

By cutting up their shares into smaller pieces, they also make the stock available to more investors. Not everyone has $1,600 to buy a single share!

Yet a stock split is not enough of a reason to buy a company. Over the long haul, the value of a stock is determined by its earnings, not its price.

So with Broadcom ready to decimate its stock price (using the original meaning of the word “decimate,” or to reduce by one-tenth), let’s review the facts to see if this tech growth stock is worth buying regardless of when you do.

A Closer Look at Broadcom Stock

Broadcom stock used to be bought because it was the premier provider of mobile device chipsets, primarily to Apple (NASDAQ:AAPL). The consumer electronics maker accounts for 20% of all of Broadcom’s $28 billion in annual revenue, or about $5.6 billion. 

To put that in perspective, Broadcom’s top five customers represent 35% of revenue so Apple’s contribution is huge.

While mobile device chips are still a significant portion of the chipmaker’s business, more recently Broadcom began focusing on data center infrastructure, such as Ethernet switching and routing silicon.

It is there where it should get a competitive edge to give the company a substantial runway for future growth.

The chipmaker is seeing tremendous growth in AI chip sales. They are outpacing the sales of non-AI chip sales, which are on the decline.

Custom AI accelerators and merchant networking chips helped boost AI chip sales 35% in the first quarter. Non-AI chips, on the other hand, dropped 30% year-over-year.

Broadcom anticipates AI chips to bring in $11 billion in revenue this year, representing 25% of total sales. That’s up from 15% in 2023. Management increased its full-year revenue guidance to $51 billion, almost all of it driven by AI.

Broadcom’s Networking Advantage

Broadcom’s competitive edge in networking will be driven by the increased use among hyperscalers of AI clusters.

CEO Hock Tan told analysts during the company’s earnings conference call that “seven of the largest eight AI clusters in deployment today use Broadcom Ethernet solutions.”

Ethernet switching should become more prominent and take more market share within the generative AI framework.

Compared to traditional front-end networks connecting general purpose servers, we should see AI accelerators grow in importance in back-end network. This is where Broadcom will shine and see its business grow.

Again, Tan told analysts, “we now expect networking revenue to grow 40% year on year, compared to our prior guidance of over 35% growth.”

Because of its wireless chip business, but especially due to its work in networking, it has a large and growing competitive edge over the competition.

A Full Complement of Growth Opportunities

The short answer to whether Broadcom stock is a buy either before or after its stock split is yes. 

Its relationship with Apple remains solid regardless of the tech stock’s own AI chip ambitions. Broadcom sells thin-film bulk acoustic resonators filters exclusively to Apple.

Plus, they are included in every iPhone sold. It was only a year ago that Apple and Broadcom signed a multiyear, multibillion-dollar agreement to develop 5G radio frequency components and other wireless connectivity components for the mobile device.

The networking solutions it is developing as discussed above will provide an exceptionally strong growth component to the business. It will only add to the potential for Broadcom stock.

Add in the chipmaker’s software business, which it greatly enhanced after acquiring VMware, and you have a complete package of opportunities for massive gains.

Although Broadcom stock is premium priced at current valuations, it is worth the cost. That is regardless of whether the stock is selling for $1,600 a share or $160 a share.

On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Rich Duprey has written about stocks and investing for the past 20 years. His articles have appeared on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been referenced by U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, and numerous other news outlets.

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