AVGO Sell Alert: Profit Taking Ahead of Broadcom Stock Split

I understand that completely. We all want to find the “new”. NVIDIA (NASDAQ:NVDA). Since Broadcom (NASDAQ:AVGO) is an AI hardware company that is considered by some to be the latest “new Nvidia.” It’s risky to invest in the latest shiny metal object, so I can’t recommend Broadcom stock.

I’m not going to win any popularity contests with this controversial stance. But my instinct tells me that if the crowd is zigging, I have to zigzag. Broadcom is a great company in a red-hot industry, but the market knows that. Investors also know about the upcoming stock split, so let’s tackle that topic without further ado.

Broadcom joins the stock split club

Nvidia recently did its stock split and Broadcom will soon do a 10-for-1 stock split. I’m not saying that Broadcom is copying Nvidia, but the timing is certainly interesting.

Stock traders went crazy, sending Broadcom’s stock price soaring after the company announced its stock split. Granted, they also celebrated Broadcom’s second-quarter fiscal 2024 results, which showed 43% year-over-year revenue growth.

Hock Tan, president and CEO of Broadcom, cited “demand for AI” as the main driver of the company’s quarterly results.

So if you’re considering investing in Broadcom, you should hope that demand for AI hardware continues to grow rapidly, because that’s exactly what the market seems to expect right now.

In any case, Broadcom shares will trade on a split-adjusted basis on July 15. So the billion-dollar question is whether investors should stock up on Broadcom shares before the split.

If it is “dead certain”, avoid it like the plague

“This is a surefire way to drive your stock up,” noted Dennis Dick, an analyst at Triple D Trading, of Broadcom’s stock split announcement. Dick added that the move was “straight out of Nvidia’s book.”

Maybe I’m just a stubborn old troublemaker, but I’m skeptical of anything that’s considered “surefire” in the financial markets. That kind of language makes me want to run for the mountains.

The overwhelming optimism in the market just gives me goosebumps. JPMorgan Chase analysts are already signaling that Broadcom can “dominate” the high-end of the custom chip market.

Bernstein analyst Stacy Rasgon calls Broadcom the “second best AI story in this space” (after Nvidia, of course).

Almost universally, analysts are using what I call a raise-and-praise approach. They are doing their best to raise their price targets on Broadcom stock and heaping effusive praise on the company.

Let us never forget that the market is highly efficient and forward-looking. By now, all the benefits of the highly anticipated stock split are already factored into Broadcom’s share price. There is no point in trying to get ahead of other stock traders at this point, because that only ends up chasing, and sooner or later the chasers will be punished.

To reinforce my point, Broadcom’s GAAP price-to-earnings (P/E) ratio for the last 12 months is 72.92, which is significantly higher than the sector’s average P/E of 30.5.

Broadcom Stock: Take the Money and Run

My point here is that Broadcom is already very highly valued and the market is fully aware of the upcoming stock split. It’s not that traders are going to sit around and wait for the event. They have already stocked up on Broadcom shares in anticipation of the event.

Don’t get me wrong. Broadcom is a good company in a hot new tech hardware industry. But the market already knows that.

So don’t be tempted to chase Broadcom stock after a massive rally. If you happen to own shares and are in a profitable position, today is a great day to “take the money and run.” Then wait for a price decline of at least 20% before considering a new investment in Broadcom.

On the day of publication, David Mnadel had (neither directly nor indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com policies. Publishing guidelines.