Why Nvidia?
Advent of artificial intelligence (AI) has been a boon to many companies.
None more so than $NVIDIA Corp(NVDA)$.
As leading supplier of processors used for AI, Nvidia has experienced unprecedented growth.
In the company's fiscal Q1 2025 (ended 28 Apr 2024):
Its revenue grew +262% YoY to $26 billion.
While earnings per share (EPS), soared +629% to $5.98.
Marking the 4th consecutive quarter of triple-digit sales and profit growth.
All these have driven Nvidia's stock price up +650% since the start of 2023.
In conjunction with its financial report, Nvidia announced a 10-for-1 stock split (to be initiated after market closes on Fri, 07 Jun 2024).
Come Mon, 10 Jun 2024, Nvidia will trade based on split-adjusted basis, facilitating stock ownership to become more accessible to employees and investors.
Last snapshot of Nvidia original stock price
Historically speaking, stock split that happen after a company has done well (for a while), usually make the stock price go up.
While this describes Nvidia to a tee, there are other companies benefiting from AI proliferation too.
A Chip Off The Old Block
One such company that could also be poised for a stock split is Nasdaq: $Broadcom(AVGO)$.
What is Broadcom?
It is one of the world's largest custom semiconductor suppliers.
The company supplies a broad cross-section of products used in (a) data centers, (b) cloud computing, (c) networking, (d) broadband, (e) wireless, (f) infrastructure, (g) storage, (h) AI, and more.
Broadcom's many products form the backbone of the AI ecosystem.
Pros & Cons.
For Broadcom, to carry a broad array of products can be both a curse and blessing:
Disadvantage - The cyclicality in wireless communications has been a drag on business in recent years, even as its AI business has ramped up.
Advantage - On the other hand, as one of the leading suppliers of 5G wireless chips and systems, Broadcom is well-positioned to benefit from a rebound in the space.
Q1 2024 Earnings.
Overall, Broadcom's business is accelerating. Its Q1 2024 earnings speak for itself.
Revenue: came in at $12.9 billion, that is +34% gain YoY.
Earnings per share, adjusted (EPS): was $10.99, up +6% YoY.
Net income: was $5.25 billion, that is +17.2% YoY.
2024 Outlook.
Management expects Broadcom's strong growth to continue, guiding for full-year revenue of $50 billion, which would represent growth of 40%.
Many in the market will be keeping a close tab of AVGO this year, after it officially acquire VMWare in November 2023.
At the surface, it should be a match-made-in-heaven. This is because Broadcom, specializes in semiconductor and infrastructure software solutions while VMware, leads in cloud computing virtualization software.
Stock Split Candidate?
Looking at Broadcom's (a) track record and (b) current price will explain why the company is a solid stock split candidate.
Over the past decade, Broadcom has grown its revenue by +843% (as of post) while its net income jumped +882%. (see below)
This solid operating and financial performance has lit a fire under the stock, which is up an impressive +1,740%, without the massive opportunity represented by generative AI.
AVGO 10 years stock price vs S&P 500 performance
Just to be clear, Broadcom has never initiated a stock split, but that does not mean it's not a prime candidate.
The stock price clocked in at nearly $1,4062 when the market closed on Fri, 07 Jun 2024, making it among the top 15 most expensive stocks trading on US markets. (see below)
There's more.
The fast growth of AI is making data centers upgrade their servers because the current ones aren't powerful enough for AI.
$Bank of America(BAC)$, Analyst Ruplu Bhattacharya says that because of these servers upgrades, the data centre market is expected to jump in size by 50% every year for the next 3 years.
As one of the leading providers of technology used in data centers, Broadcom is well-positioned to benefit from this secular tailwind.
Accelerating pace of AI adoption could represent the most compelling opportunity for Broadcom.
Broadcom Management recently revealed that:
Software revenue soared +156% YoY.
They (now) estimate that AI-related revenue will climb to $10 billion.
This will represent 35% of Broadcom's semiconductor solutions revenue and 20% of its total revenue in fiscal 2024.
Earnings potential - Generative AI?
AI is a huge opportunity, and now in its nascent stage - its just the tip of the iceberg.
Consulting firm called McKinsey & Company predicts Generative AI could:
Bring in between $2.6 trillion & $4.4 trillion every year for the next 10 years.
(That number) gets even bigger, almost doubling, when the impact of embedded software is included.
Final look at Broadcom.
Broadcom’s is currently at 28x its forward earnings.
It’s valuation is just a slight premium compared to a multiple of 27 for the S&P 500.
It is not an apples-to-apples comparison because Broadcom has delivered nearly 10 times the returns of the S&P 500 over the past decade.
Combined with its position in the AI ecosystem and significant growth potential, it explains why Broadcom represents a compelling opportunity -- even if it does not initiate a stock split.
Having said that, we do know all the plus(es) that come with a stock split - don’t we!
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