Investors cheered when Nvidia (NASDAQ: NVDA) announced a 10-for-1 stock split during its earnings report in late May. And in the two weeks that followed — the time leading up to the operation — the shares climbed nearly 30%. Investors like stock splits because they bring the prices of high-flying stocks down, opening them up to a broader range of buyers, and they show the particular company is confident about its future — the idea is the company believes its stock has what it takes to climb once again.
This past week, on the tails of Nvidia’s stock split, fellow artificial intelligence (AI) giant Broadcom (NASDAQ: AVGO) said that it, too, would launch a 10-for-1 split. Like Nvidia, Broadcom’s shares have posted triple-digit gains over the past few years and soared past $1,000 in recent times. Broadcom is planning its operation for July 12. Now the question is whether the stock could follow in the footsteps of Nvidia and climb in the double digits ahead of the split. Let’s find out.
The Broadcom stock split
First, a few words about stock splits in general and the upcoming Broadcom operation. In a stock split, a company issues more shares to current shareholders. Doing so brings down the price of each individual share without changing the overall value of the company or the value of each investor’s holding. The idea is to make it easier for a wider range of investors, for example those with smaller budgets, to get in on a particular player.
As for Broadcom, if you own one share as of July 11, you’ll receive nine additional ones after the close of markets on July 12. And on July 15, the shares start trading at the split-adjusted price, which, considering today’s Broadcom price, should be around $173.
Broadcom shares, following the announcement, advanced 12% in one trading session as investors welcomed the news, and the shares climbed more than 3% the following day. So Broadcom is off to a good start when it comes to pre-stock-split performance.
It’s possible that, like Nvidia, the stock will continue to advance ahead of the operation, as investors have been particularly interested in companies launching such operations. But it’s important to remember that, whether Broadcom rises or not in this one-month period before the split, this is just a short-term movement. That means, whether you’re already a Broadcom shareholder or buy the stock in the coming days, the performance over the next few weeks is unlikely to change your returns if you hold on for the long term. I’m talking about at least five years.
Could Broadcom gain over time?
The bigger question is whether Broadcom has the potential to, after its split, keep gaining over time. And here, things are looking bright. Broadcom is a semiconductor and networking giant, selling products that power smartphones, help data centers move and store data, and much more. Its niche has helped the company grow earnings over time, and Broadcom’s commitment to research and development (R&D) is a positive sign for the future, with this ongoing innovation potentially translating into growth.
Broadcom has increased R&D spending at a 27% compounded annual rate since 2009. The company invested more than $5 billion in this area in the most recent fiscal year.
This commitment has helped Broadcom address the soaring demand from AI customers for AI networking and custom accelerators. In the most recent quarter, Broadcom said it doubled the number of switches sold compared to the year-earlier period, and demand was particularly strong for Jericho3, a product that scales connectivity to 32,000 graphics processing units (GPUs) in one cluster.
Also keep in mind that AI growth is in its early days, as analysts predict the market may reach beyond $1 trillion at the end of the decade. That’s up from a little over $200 billion today.
All of this means Broadcom’s earnings could continue to climb as more and more companies develop AI projects or expand current ones. And that may boost share performance over time. So, yes, if Broadcom shares advance before the stock split, that’s good news for shareholders. But if they don’t, I wouldn’t worry. This networking giant’s long-term prospects are solid, and that means whether you buy the stock today or in the coming months you could win big over time.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Nvidia Soared Almost 30% Ahead of Its Stock Split. Can Broadcom Do the Same? was originally published by The Motley Fool
