Meet Wall Street's Newest Artificial Intelligence (AI) Stock-Split Stock (No, It's Not Nvidia) | The Motley Fool (2024)

Some companies create so much value over the long term that their stock prices soar into the hundreds, or even thousands of dollars, making them somewhat inaccessible to smaller investors.

For example, Nvidia stock recently traded above $1,200 following a whopping 205% gain over the past year, as sales surged for its artificial intelligence (AI) data center chips. As a result, the company just executed a 10-for-1 stock split that increased the number of shares in circulation tenfold while reducing the price per share by 90%. Now investors can buy a share in Nvidia for just $129.

Stock splits are purely cosmetic, so they don't affect the value of the underlying company. But they can attract a broader group of investors, which often drives the stock price higher when the new group of investors swoops in and starts buying.

Meet the latest AI company to split its stock

Broadcom (AVGO 5.41%) is a tech conglomerate with operations in the semiconductor space, cybersecurity, and even cloud software, which it has built both organically and through a wave of acquisitions.

Broadcom stock soared 530% over the last five years, carrying it to a price of $1,679 as of this writing. Therefore, for the same reason Nvidia executed a stock split, Broadcom just announced a 10-for-1 split of its own. It will go into effect on July 15, at which point investors will be able to buy one full share in the company for around $167 (based on where it trades now).

Beyond the stock split, here's why investors might want to buy into the Broadcom story.

A multifaceted AI play

Broadcom is responsible for several semiconductor and computing innovations over the last few decades, including the optical mouse sensor and the world's first small infrared transceiver that facilitated wireless data transfer between computers, phones, and printers. But the company was transformed when it merged with semiconductor giant Avago Technologies in 2016, and it has been on an acquisition spree ever since.

The new-look Broadcom spent $98.6 billion between 2018 and 2023, buying three companies: semiconductor device supplier CA Technologies, cybersecurity giant Symantec, and cloud software developer VMware. All of them are now either developing AI, deploying AI into their existing businesses, or servicing other AI businesses.

On the chip side, Broadcom is an expert in data center networking solutions and it's experiencing red-hot demand across a number of products and services. The company says seven of the world's eight largest AI graphics processing chip (GPU) clusters use its Ethernet connectivity solutions. Plus, during the recent fiscal 2024 second quarter (ended May 5) sales of Broadcom's data center switches doubled year over year.

Switches like the Tomahawk 5 regulate how quickly data travels between servers and devices, so they are critical in high workloads like AI where thousands of GPUs are working in tandem to train and develop models.

With respect to Broadcom's other businesses, Symantec is weaving AI into its cybersecurity software in partnership with Alphabet's Google Cloud Vertex AI platform to give customers faster and more accurate protection. VMware, on the other hand, allows businesses to deploy virtual machines so multiple developers can plug into one server to use its full capacity. Considering there is a shortage of advanced AI chips, developers can't afford to leave any data center computing capacity underutilized.

Broadcom's AI revenue is soaring

Broadcom generated $12.5 billion in total revenue during Q2, which represented 43% growth from the year-ago period. The strong result was due mainly to the inclusion of VMware's revenue, which wasn't part of the conglomerate in Q2 last year because the acquisition hadn't yet closed.

But here's a more important point: Broadcom said $3.1 billion of its Q2 revenue was attributable to AI, which was a whopping 280% increase from the year-ago period. Much of that came from the company's networking segment, which includes data center switches and Ethernet solutions, among other products and services.

If that pace of growth continues, it won't be long before AI becomes the dominant source of Broadcom's revenue. Management already expects AI revenue to top $11 billion for the full year in fiscal 2024 (ending Oct. 30).

That undoubtedly played a role in the company lifting its full-year revenue forecast for fiscal 2024 to $51 billion, from $50 billion previously.

Why Broadcom stock is a buy now

Broadcom delivered $43.55 in non-GAAP earnings per share over the last four quarters. Non-GAAP results exclude one-off expenses like acquisitions and non-cash expenses like stock-based compensation, so they are a good indication of how the actual business is performing. To account for Broadcom's upcoming 10-for-1 stock split, investors should divide the company's earnings by 10 -- so the above number will become $4.35 after July 15.

Based on those earnings and Broadcom's current stock price, it trades at a price-to-earnings (P/E) ratio of 38.5. That makes it more expensive than the Nasdaq-100 technology index, which trades at a P/E ratio of 30.9. However, Wall Street is forecasting rapid growth for the company, so the stock appears significantly cheaper the further into the future you look.

For example, the Street estimates Broadcom will deliver $47.02 in earnings in fiscal 2024, placing the stock at a forward P/E ratio of 35.7. Earnings are then expected to climb to $57.22 in fiscal 2025, reducing the stock's forward P/E to just 29.3. Those estimates could move even higher if the company's lightning-quick AI growth persists over the next year.

Simply put -- and assuming Wall Street's forecasts are accurate -- investors with a time horizon of two years or more could do extremely well if they buy Broadcom stock today.