AVGO Alert: Why Broadcom’s 10-for-1 stock split could trigger a buying spree among tech companies

In less than two weeks Broadcom (NASDAQ:AVGO) will split its shares 10-for-1. Shares currently trading for more than $1,600 will then be worth about $160 each.

A stock split does not change a company. An investor could buy Broadcom stock before or after the split and would still own the same company.

Nevertheless, splits are often received positively on the stock market. They signal that management believes in further growth and future profits.

By breaking their shares into smaller chunks, they also make them accessible to more investors. Not everyone has $1,600 to buy a single share!

But a stock split is not a sufficient reason to buy a company. In the long run, the value of a stock is determined by its earnings, not its price.

So, Broadcom is about to decimate (to use the original meaning of the word, “decimate” or “reduce by a tenth”) its stock price. So let’s look at the facts to see if this growth stock in the technology sector is worth buying, regardless of the timing.

A closer look at Broadcom stock

Broadcom shares were bought earlier because the company was the leading supplier of chipsets for mobile devices, especially for Apple (NASDAQ:AAPL). The consumer electronics maker accounts for 20% of Broadcom’s total annual revenue of $28 billion, or about $5.6 billion.

To put that into perspective, Broadcom’s five largest customers account for 35 percent of revenue, so Apple’s contribution is enormous.

While chips for mobile devices still make up a significant part of the chipmaker’s business, Broadcom has recently begun to focus on data center infrastructure, such as Ethernet switching and routing silicon.

This is where the company should gain a competitive advantage that provides it with a solid runway for future growth.

The chipmaker is seeing tremendous growth in AI chip sales, outpacing non-AI chip sales, which are declining.

Custom AI accelerators and dealer network chips helped drive AI chip sales up 35% in the first quarter, while non-AI chip sales fell 30% year-over-year.

Broadcom expects AI chips to generate $11 billion in revenue this year, or 25% of total sales, up from 15% in 2023. Management raised its full-year revenue forecast to $51 billion, almost all of which will come from AI chips.

Broadcom’s network advantage

Broadcom’s competitive advantage in networking is driven by the increasing use of AI clusters among hyperscalers.

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

Ethernet switching is likely to gain importance in the context of generative AI and capture larger market shares.

Compared to traditional front-end networks that connect general-purpose servers, AI accelerators are likely to gain traction in back-end networks. This is where Broadcom will shine and see its business grow.

And again, Tan told analysts: “We now expect network revenues to grow 40% year-on-year, compared to our previous forecast of over 35% growth.”

Due to its wireless chip business, but especially due to its work in the networking area, the company has a large and growing competitive advantage over its competitors.

A comprehensive range of growth opportunities

The short answer to the question of whether Broadcom stock is a buy before or after the stock split is yes.

The relationship with Apple remains stable despite the technology company’s AI chip ambitions. Broadcom sells thin-film acoustic resonator filters exclusively to Apple.

They are also included in every iPhone sold. Just a year ago, Apple and Broadcom signed a multi-year, multi-billion dollar deal to develop 5G radio frequency components and other wireless connectivity components for the mobile device.

The networking solutions the company is developing as described above will give the company an exceptionally strong growth element and will only further increase the potential of Broadcom stock.

When you add in the chipmaker’s software business, which it has significantly expanded since acquiring VMware, you have a complete package of opportunities for massive profits.

Although Broadcom stock is priced high at its current valuation, it is worth the price. This is true whether the stock sells for $1,600 or $160 per share.

At the time of publication, Rich Duprey did not hold (directly or 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’s disclosure policies.