Broadcom follows NVIDIA's lead in stock split. What's the aftermarket outlook?

$Broadcom(AVGO)$  , which has soared 52% this year, will officially implement a 10-for-1 stock split plan after market close on July 12th (this Friday). This move follows $NVIDIA Corp(NVDA)$  , another major AI player, and has sparked market speculation.

Let's compare the recent stock trends of NVIDIA and Broadcom. From the announcement to the actual split, NVIDIA's share price jumped about 27%, and it has risen an additional 8% since the split.

As for Broadcom, since announcing its stock split on June 12th, its share price has surged approximately 16%.

The significant surge in NVIDIA's share price before and after its stock split left the market ecstatic, and Broadcom's post-split trajectory looks equally promising. What’s the magic behind stock splits? Can Broadcom’s share price continue to climb after the split? Let's dive in.

Stock splits: a potential bullish signal

While stock splits don't change a company’s value, Broadcom's CFO notes they "make it easier for investors and employees to access Broadcom shares."

Simply put, if an investor held 100 shares before the 10-for-1 split, they would end up with 1,000 shares, with each share priced at one-tenth of its original value. This lower price can attract investors who couldn't previously afford the stock, potentially driving the share price higher.

Historical data supports the idea that stock splits signal a bullish outlook.

According to $Bank of America(BAC)$  , companies announcing stock splits typically outperform the S&P 500 Index in the 3-, 6-, and 12-month periods following the announcement.

From another angle, companies that opt for stock splits often signal potential for further growth. Firms typically split their stocks after significant price appreciation, reflecting strong market demand, robust fundamentals, and exciting growth prospects.

Do Broadcom's fundamentals support further share price growth? Let's take a look.

Performance: beat expectations

Broadcom is a global leader in communications chipsets, dominating markets such as Wi-Fi chips, Bluetooth chips, RF front-end modules, and switching and routing chips. Its products are widely used in data centers, networking, storage, and industrial applications. In 2023, Broadcom ranked as the world's fifth-largest semiconductor company by annual revenue.

Recently, Broadcom reported solid financial results. On June 12th, it released its fiscal year 2024 Q2 earnings, reporting adjusted net revenue of $12.49 billion, surpassing analysts′ expectations of $12.06 billion. Adjusted earnings per share were $10.96, higher than the projected $10.80. Additionally, the company raised its fiscal year revenue guidance from $50 billion to $51 billion.

The standout in the earnings report was Broadcom's AI business. Its AI revenue for Q2 reached 3.1 billion, and the company expects a staggering 100 billion generated in this business in 2024, accounting for 20% of total revenue.

This rapid growth in AI has fueled speculation that Broadcom might become the next NVIDIA. So, what's Broadcom's connection to AI?

A major AI player

Broadcom’s first major advantage in AI is its ASIC chips.

The AI compute chip market has two main paths: NVIDIA’s GPU-led general-purpose computing and Broadcom’s ASIC-focused customized chips. While GPUs are popular, ASICs offer higher performance, lower power consumption, and enhanced security for specific tasks, meeting crucial market needs.

A prime example is Broadcom’s collaboration with Google on TPUs. Analysts predict Google will pay Broadcom $7 billion for TPUs in 2024, increasing to $10 billion by 2025.

Broadcom's second AI strength lies in its high-speed connectivity solutions.

The company is a major player in Super Ethernet, a network solution for AI compute clusters that rivals NVIDIA’s InfiniBand. Training AI models requires numerous AI chips, which need to be interconnected for efficient data transmission. Broadcom’s switch and routing chips are essential for this AI hardware infrastructure.

Clearly, Broadcom is a key player in the AI sector, both competing with and complementing NVIDIA.

Will the rally continue?

While a stock split can boost positive sentiment, the company's actual performance and the broader market environment ultimately determine the share price trend.

Currently, analysts are optimistic about Broadcom's growth opportunities in the AI sector. Following its second-quarter earnings report, Bank of America has raised Broadcom's target price twice, now setting it at $2,150.

Additionally, several financial institutions have also increased their target prices for Broadcom. By accessing Stocks > Company > Analyst Ratings on moomoo, you can see that the average target price for $Broadcom(AVGO.US)$ is $1,881, suggesting a potential upside of about 8% from current levels.

Technical analysis: Broadcom's share price broke through the stagnant $1,200−$1,400 range that had persisted for six months following the second-quarter earnings announcement, initiating an upward trend. This suggests the market is seeking a higher valuation range for Broadcom's better-than-expected performance.

After a brief adjustment in mid-to-late June, the share price regained momentum in July and continued its upward trajectory. Given this momentum, there appears to be potential to surpass previous highs.

However, investors should also consider some negative factors associated with Broadcom. Excluding the impact of the VMware acquisition and AI growth, the company's other business segments saw a year-over-year revenue decline of 15.7%, mainly due to weak demand from sectors like telecommunications and factory automation.

Additionally, Broadcom's current P/E ratio is around 75, similar to NVIDIA's, despite significantly lower earnings, suggesting that Broadcom's share price may be somewhat overvalued.

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