Nvidia and Broadcom Complete 10-for-1 Stock Splits: Diverging Outlooks in AI Landscape

Nvidia and Broadcom Have Completed Their 10-for-1 Stock Splits, but Their Outlooks Differ Dramatically Over the Next 5 Years | The Motley Fool

Wall Street's newest artificial intelligence (AI) stock-split stocks could deliver markedly different returns for investors over the next half-decade. It's a rare time to be an investor on Wall Street. While it's perfectly normal for a next-big-thing innovation, technology, or trend to be captivating investors' attention, having two trends vying for interest at the same time doesn't happen often. Although artificial intelligence (AI) is the core catalyst that's sent the iconic Dow Jones Industrial Average, broad-based S&P 500, and growth-focused Nasdaq Composite to record-closing highs in 2024, stock-split euphoria has played a key role, too. A stock split is an event that allows a publicly traded company the opportunity to alter its share price and outstanding share count. What's noteworthy about splits is that they're entirely cosmetic, with a company's market cap and operating performance being unaffected. Stock splits come in two varieties, forward and reverse, with investors undeniably favoring the former. With a forward-stock split, a company is purposely lowering its share price to make it more nominally affordable for retail investors and/or its employees. Comparatively, the goal of a reverse-stock split is to increase a publicly traded company's share price, often to ensure that it meets the minimum continued listing standards of a major stock exchange. The reason investors favor forward splits is because they're undertaken by highly innovative companies that consistently out-execute their peers. Since 2024 began, around a dozen high-profile businesses have announced a stock split. However, none were more anticipated than that of AI titans Nvidia (NVDA 1.44%) and Broadcom (AVGO -0.31%). Nvidia's board kicked things off on May 22, with the company announcing a 10-for-1 forward split, which became effective after the closing bell on June 7. This marked the sixth stock split for Nvidia since going public in January 1999. Not long after, on June 12, Broadcom's board made history by announcing its first-ever stock split, which coincidentally was also of the 10-for-1 variety. Broadcom's split went into effect after the close of trading on Friday, July 12, with shares trading at their split-adjusted price as of today, July 15. While there's natural excitement about a company's stock being more nominally affordable for everyday investors, artificial intelligence has been the driving force for both companies. Nvidia's claim to fame is its first-mover advantages with AI-graphics processing units (GPUs). In 2023, 98% of the 3.85 million AI-GPUs that were shipped came from Nvidia, according to semiconductor analysis firm TechInsights. The company's H100 GPU has become the go-to chip desired by businesses wanting to train large language models and run generative AI solutions. What's more, investors are excited about the future of Nvidia's AI-GPU architecture. The company's Blackwell platform, which offers accelerated computing improvements in a number of areas, including quantum computing and generative AI, is set to begin shipping to customers later this year. Meanwhile, in June, CEO Jensen Huang teased the release of the Rubin platform by 2026. As for Broadcom, it's quickly become the premier name in AI-driven networking solutions. It capitalized on the artificial intelligence hype last year by introducing its Jericho3-AI fabric in April 2023, which is able to connect up to 32,000 GPUs in AI-accelerated data centers. Jericho3 is a solution that's designed to maximize the compute capacity of GPUs -- something necessary for the split-second decision-making required of AI software and systems -- as well as reduce tail latency. Broadcom has also been a popular partner for some of the largest and most-influential tech companies, including infrastructure giant Dell Technologies and Alphabet, the parent company of internet search engine Google and cloud infrastructure service platform Google Cloud. Based on historical data from Bank of America Global Research that dates back to 1980, companies conducting forward-stock splits have averaged a 25.4% return in the 12 months following their announcement. This is more than double the average annual return of 11.9% for the benchmark S&P 500 over the comparable period. Statistically speaking, Nvidia and Broadcom would appear to be poised for more upside. But dig beneath the surface and you'll find a number of clear-cut reasons why Broadcom has the tools and intangibles to handily outperform Nvidia's stock over the coming five years. If there's a prevailing theme that makes Broadcom the far more-favorable stock to own in the coming years, it's history. Since the proliferation of the internet three decades ago, no next-big-thing innovation, technology, or trend has avoided a bubble-bursting event early in its existence. This is a roundabout way of saying that investors consistently overestimate the utility and/or adoption of new innovations and technologies, and artificial intelligence is unlikely to be the exception to this unwritten rule. The entirety of Nvidia's nearly $3 trillion increase in market value since the start of 2023 has come on the heels of its AI-GPUs and CUDA platform, which is a toolkit that helps developers build large language models. If the AI bubble were to burst at some point in the future, Nvidia's stock would probably be clobbered more than any other AI company. Although Broadcom has also enjoyed a sizable boost from AI, it's a considerably more-diversified company that would fare better if history were to rhyme. For example, Broadcom generates a notable percentage of its sales from wireless chips and accessories used in next-generation smartphones. It also makes optical components used in industrial equipment, networking solutions for newer automobiles, and cybersecurity solutions, to name a small number of its other ventures and sales channels. Whereas the bursting of the AI bubble would be damning for Nvidia, it wouldn't be an end-all for Broadcom. Something else to consider is that Broadcom's rapidly growing dividend provides a safer foundation and, arguably, more mature investor base than Nvidia. Even with Nvidia recently increasing its quarterly payout by 150% to $0.01 per share on a post-split basis, the company's token yield is only 0.03%. Comparatively, Broadcom's quarterly payout has catapulted higher by 7,400% since late 2010. Whereas the company had previously been pacing a $0.28 base annual payout, Broadcom is now on track to dole out a cumulative $21/share annually to its investors. This is good enough for a 1.2% yield, and it demonstrates how consistent Broadcom's growth in operating cash flow has been since the end of the Great Recession. The final reason Broadcom can handily outperform Nvidia in the return column over the next five years is their respective valuations. Nvidia's trailing-12-month (TTM) price to sales (P/S) ratio recently topped 40. This effectively matches the TTM P/S peaks witnessed prior to the dot-com bubble bursting from the likes of Amazon and Cisco Systems. Although Broadcom's TTM P/S ratio of 19 is considerably higher than its average of 5 to 7 times sales over much of the last decade, it'll have a much easier time growing into its current valuation than Nvidia. Between Wall Street's two premier stock-split stocks, Broadcom looks to be a smarter long-term investment than Nvidia.

Broadcom: One Of The Best Investments Money Can Buy Today (AVGO)

I rate Broadcom as BUY, being one of the best AI companies money can buy today, with a share price target of $200 by the end of the year. Broadcom Inc. (NASDAQ:AVGO) has been one of the main beneficiaries of the AI investment narrative, ever since Chat-GPT's introduction in November 2022, showcasing to the world the power of generative AI solutions. Broadcom is a true example of a compounder at its finest. The company has a very healthy balance sheet with a triple-B rating from S&P Global and the stock is up 496% in a span of the last 5 years, thanks to its best-of-breed custom chips offering designed for specific needs of major companies like Apple (AAPL), Cisco Systems (CSCO) and Google (GOOGL). Partially helped by the 10:1 stock split effective as of 15th July, making the stock more accessible to a wider range of investors and employees, Broadcom is up 52% year-to-date, compared to less than 18% gain of S&P 500. The parabolic rise in the stock's price shouldn't scare you. Instead, it is well-supported by the improving fundamentals, with Broadcom's impressive operational efficiency, generating massive cash flow, while trimming unnecessary expenses. As a dividend growth investor in my heart, it's difficult to find a better place to be, than invested in Broadcom. Following the superb performance, the company offers a rather unattractive 1.2% dividend yield, however, in the last 10 years alone, the dividend grew by 1,540% with much more room for growth in the future supported by very effective capital allocation and benefiting from the AI booming spending. Broadcom's unique custom chip offering sets it apart from competitors such as Nvidia (NVDA), Intel (INTC), and Advanced Micro Devices (AMD) which offer predominantly one-fits-all solutions. This differentiation positions Broadcom exceptionally well as AI spending booms, unlocking major growth in its networking semiconductor sales. The company is no longer a bargain, trading at a Forward P/E of 35.6x for its FY24 forecasted earnings, well above its historical valuation standards, however, we need to be mindful of the new growth driver. Broadcom remains relatively cheaper compared to Nvidia and AMD, so what's next for the company and is it a good investment after its parabolic rise? Broadcom's Business Overview The chances are you are already well-acquainted with Broadcom's business, thanks to its massive $791B market cap, placing it in the 10th spot in the market-weighted S&P 500 with 1.6% weight. However, in case you are not familiar, Broadcom is predominantly selling semiconductor hardware focusing on so-called, application-specific integrated circuits better known as (ASICS), or simply put custom chips. Custom chips are more of a niche product, compared to the GPUs sold by Nvidia which are one-size-fits-all in data centers, and that's precisely what makes Broadcom unique with a more diversified portfolio. The networking and wireless chips business segments are Broadcom's crown jewels responsible for its market-dominant position today with semiconductor sales representing 58% of its revenue during Q2 FY24. The custom chips, designed specifically to meet the unique needs of its customers, pose the risk of overreliance on a single customer. That used to be the case for Broadcom as well with its thin-film bulk acoustic resonator which the company is exclusively selling to Apple for iPhones, representing 20% of the chipmaker's revenue in 2023 and 2022. One can argue Apple's success of the last decade contributed to Broadcom's growth significantly. Over the years, Broadcom has built strategic partnerships with other major equipment vendors such as Arista Networks (ANET) and Cisco Systems. Even as Broadcom's business experiences organic growth, the majority of its past success can be attributed to strategic acquisitions of small and large firms alike, which helped to shape the portfolio and improve operational efficiency by cutting costs and streamlining its business. The company has proved to be a superb capital allocator with 30% ROE and 12% ROI in the past 5 years, well above the industry's averages. In order to tackle semiconductors and Apple's sales dependency, the company has been strategically acquiring companies in the infrastructure software space acquiring CA Technologies back in 2018, Symantec's security division in 2019, and as of 2023, the multi-cloud provider VMware for a staggering $61B. The acquisition of VMware should help to de-risk Broadcom's portfolio, bringing more balance with highly competitive software sales expected to reach up to 50% of the company's revenue over the medium term. Instead of chasing small deals, Broadcom is strategically targeting large enterprises and governments with its infrastructure software offerings as the switching costs tend to be much higher, ensuring lasting business partnerships. What's Next for Broadcom? 739%. That's how much revenue growth Broadcom has delivered in the past decade. Naturally, moving forward, replicating similar top-line growth will be a challenging task thanks to its already substantial size. Yet, after the management has raised its forecast from an initial $50B, the revenue is expected to hit $51B in FY24, growing 39% YoY mostly thanks to the inorganic growth from VMware. Still quite conservative guidance in my opinion, however, the management has signaled more cost-cutting as initially expected for VMware, which should further help to expand, the already high margins. If we look at the Q2 FY24 earnings through a lens of organic growth instead, the revenue has grown by 12% YoY with AI sales being responsible for almost all of the growth. Broadcom is indeed seeing a positive shift with strong demand for networking chips, and AI accelerators used in generative AI infrastructure. The sales of AI Broadcom's AI chips increased 35% YoY, reaching $3.1B in Q2. The AI chips are now poised to reach $11B in sales this fiscal year, which would represent 25% of the company's sales. From my point of view, this is still quite a conservative estimate and management is being cautious in case the economy takes a turn, hindering the AI spending narrative by majors such as Google, Meta Platforms (META), and Microsoft (MSFT). If the bull case for AI persists, Broadcom is extremely well-positioned to keep benefiting from generative AI spending being the 2nd largest semiconductor company behind Nvidia. If Broadcom manages to keep the AI chips growth rate at around 35%, in the following fiscal year, the AI sales have the potential to account for more than 32% of the company's sales. However, let's not forget that for now Broadcom's 33% semiconductor sales come from non-AI applications and this area of business is under threat with sales falling 30% YoY, thanks to the cyclical downturn in the legacy economy, witnessed by other chip-makers alike. Analysts are forecasting the generative AI market could reach $1.3T by 2032, growing at a staggering annualized rate of 42%. The expectation is that AI infrastructure and large language model training are the key areas to see booming spending before the industry shifts towards more customer-oriented used cases, benefiting Broadcom greatly. Valuation The key area of concern, as with all companies with a strong momentum, is the valuation. Looking at the valuation through a standard P/E ratio does not make much sense. As you can see below, the P/E ratio right now is at 73.7x its earnings, well above the average of its past 5 years. Instead, understanding the forward growth and how long the company can compound is the key. The analysts polled by S&P Global are forecasting the following growth in the next years: Expected EPS in FY24: $4.78, YoY growth of 13% Expected EPS in FY25: $6.00, YoY growth of 26% Expected EPS in FY26: $6.95, YoY growth of 16% The analysts' track record has always been rather conservative, with Broadcom delivering 60% of the time above their forecasts, while 40% of the time the company has hit the projections. As a result of the conservative EPS growth forecasts, Broadcom's forward P/E valuation is on the rather pessimistic side as well: Forward P/E FY24: 35.6x Forward P/E FY25: 28.3x Forward P/E FY26: 24.4x Yet, Broadcom's valuation implies a significantly lower premium compared to Nvidia's forward valuation (FY Adjusted): Forward P/E FY25: 48.3x Forward P/E FY26: 36.4x Forward P/E FY27: 31.3x And similarly to AMD's forward valuation: Forward P/E FY24: 51.7x Forward P/E FY26: 33.4x Forward P/E FY24: 24.7x From the data, we can see that Broadcom's valuation in fact carries the least premium in each of the subsequent years with the EPS growth already embedded inside of the forward valuation. I view Broadcom as one of the best AI plays money can buy today, carrying the least premium in relation to its peers while having a wide moat, a well-diversified portfolio of hardware and software, and sustainable EPS growth. I anticipate that Broadcom's shares will trade around $200 per share by the end of the year, implying an 18% upside from today's share price, boosted by stronger-than-expected AI-chip-related sales, reaching at least $13B by the end of FY24 with a positive momentum into FY25. Takeaway All in all, Broadcom is the 2nd best bet on the AI spending behind Nvidia. Even though only 25% of Broadcom's sales are generated by chips with AI applications, particularly its networking and accelerator chips, the company is seeing tremendous demand. The AI chips experienced 35% YoY sales growth in Q2, expected to keep growing in the following years as the AI spending booms and the generative AI industry grows at an unprecedented rate. The strong demand for AI chips, alongside the successful acquisition of VMware, helped Broadcom to diversify away from Apple's 20% sales dependency in the past 2 years while maintaining industry-leading profit margins. As with most companies with strong momentum, the valuation remains a challenge, yet I view Broadcom at today's price in relation to its forward EPS growth as reasonably priced with a BUY rating. With 30 years until retirement, as a Financial Analyst at a Fortune 500 firm, I'm strategically building a robust Growth Portfolio designed to fuel both capital appreciation and consistent dividend growth. My focus is on identifying companies with wide moats, sustainable competitive advantages, and reasonable valuations relative to their projected earnings growth across US and EU."Beyond mere yield chasing, dividend investing for me is about uncovering companies with robust free cash flow." Analyst's Disclosure: I/we have a beneficial long position in the shares of AVGO, NVDA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Broadcom: One Of The Best AI Picks Money Can Buy Today (AVGO)

I rate Broadcom as BUY, being one of the best AI companies money can buy today, with a share price target of $200 by the end of the year. Broadcom Inc. (NASDAQ:AVGO) has been one of the main beneficiaries of the AI investment narrative, ever since Chat-GPT's introduction in November 2022, showcasing to the world the power of generative AI solutions. Broadcom is a true example of a compounder at its finest. The company has a very healthy balance sheet with a triple-B rating from S&P Global and the stock is up 496% in a span of the last 5 years, thanks to its best-of-breed custom chips offering designed for specific needs of major companies like Apple (AAPL), Cisco Systems (CSCO) and Google (GOOGL). Partially helped by the 10:1 stock split effective as of 15th July, making the stock more accessible to a wider range of investors and employees, Broadcom is up 52% year-to-date, compared to less than 18% gain of S&P 500. The parabolic rise in the stock's price shouldn't scare you. Instead, it is well-supported by the improving fundamentals, with Broadcom's impressive operational efficiency, generating massive cash flow, while trimming unnecessary expenses. As a dividend growth investor in my heart, it's difficult to find a better place to be, than invested in Broadcom. Following the superb performance, the company offers a rather unattractive 1.2% dividend yield, however, in the last 10 years alone, the dividend grew by 1,540% with much more room for growth in the future supported by very effective capital allocation and benefiting from the AI booming spending. Broadcom's unique custom chip offering sets it apart from competitors such as Nvidia (NVDA), Intel (INTC), and Advanced Micro Devices (AMD) which offer predominantly one-fits-all solutions. This differentiation positions Broadcom exceptionally well as AI spending booms, unlocking major growth in its networking semiconductor sales. The company is no longer a bargain, trading at a Forward P/E of 35.6x for its FY24 forecasted earnings, well above its historical valuation standards, however, we need to be mindful of the new growth driver. Broadcom remains relatively cheaper compared to Nvidia and AMD, so what's next for the company and is it a good investment after its parabolic rise? Broadcom's Business Overview The chances are you are already well-acquainted with Broadcom's business, thanks to its massive $791B market cap, placing it in the 10th spot in the market-weighted S&P 500 with 1.6% weight. However, in case you are not familiar, Broadcom is predominantly selling semiconductor hardware focusing on so-called, application-specific integrated circuits better known as (ASICS), or simply put custom chips. Custom chips are more of a niche product, compared to the GPUs sold by Nvidia which are one-size-fits-all in data centers, and that's precisely what makes Broadcom unique with a more diversified portfolio. The networking and wireless chips business segments are Broadcom's crown jewels responsible for its market-dominant position today with semiconductor sales representing 58% of its revenue during Q2 FY24. The custom chips, designed specifically to meet the unique needs of its customers, pose the risk of overreliance on a single customer. That used to be the case for Broadcom as well with its thin-film bulk acoustic resonator which the company is exclusively selling to Apple for iPhones, representing 20% of the chipmaker's revenue in 2023 and 2022. One can argue Apple's success of the last decade contributed to Broadcom's growth significantly. Over the years, Broadcom has built strategic partnerships with other major equipment vendors such as Arista Networks (ANET) and Cisco Systems. Even as Broadcom's business experiences organic growth, the majority of its past success can be attributed to strategic acquisitions of small and large firms alike, which helped to shape the portfolio and improve operational efficiency by cutting costs and streamlining its business. The company has proved to be a superb capital allocator with 30% ROE and 12% ROI in the past 5 years, well above the industry's averages. In order to tackle semiconductors and Apple's sales dependency, the company has been strategically acquiring companies in the infrastructure software space acquiring CA Technologies back in 2018, Symantec's security division in 2019, and as of 2023, the multi-cloud provider VMware for a staggering $61B. The acquisition of VMware should help to de-risk Broadcom's portfolio, bringing more balance with highly competitive software sales expected to reach up to 50% of the company's revenue over the medium term. Instead of chasing small deals, Broadcom is strategically targeting large enterprises and governments with its infrastructure software offerings as the switching costs tend to be much higher, ensuring lasting business partnerships. What's Next for Broadcom? 739%. That's how much revenue growth Broadcom has delivered in the past decade. Naturally, moving forward, replicating similar top-line growth will be a challenging task thanks to its already substantial size. Yet, after the management has raised its forecast from an initial $50B, the revenue is expected to hit $51B in FY24, growing 39% YoY mostly thanks to the inorganic growth from VMware. Still quite conservative guidance in my opinion, however, the management has signaled more cost-cutting as initially expected for VMware, which should further help to expand, the already high margins. If we look at the Q2 FY24 earnings through a lens of organic growth instead, the revenue has grown by 12% YoY with AI sales being responsible for almost all of the growth. Broadcom is indeed seeing a positive shift with strong demand for networking chips, and AI accelerators used in generative AI infrastructure. The sales of AI Broadcom's AI chips increased 35% YoY, reaching $3.1B in Q2. The AI chips are now poised to reach $11B in sales this fiscal year, which would represent 25% of the company's sales. From my point of view, this is still quite a conservative estimate and management is being cautious in case the economy takes a turn, hindering the AI spending narrative by majors such as Google, Meta Platforms (META), and Microsoft (MSFT). If the bull case for AI persists, Broadcom is extremely well-positioned to keep benefiting from generative AI spending being the 2nd largest semiconductor company behind Nvidia. If Broadcom manages to keep the AI chips growth rate at around 35%, in the following fiscal year, the AI sales have the potential to account for more than 32% of the company's sales. However, let's not forget that for now Broadcom's 33% semiconductor sales come from non-AI applications and this area of business is under threat with sales falling 30% YoY, thanks to the cyclical downturn in the legacy economy, witnessed by other chip-makers alike. Analysts are forecasting the generative AI market could reach $1.3T by 2032, growing at a staggering annualized rate of 42%. The expectation is that AI infrastructure and large language model training are the key areas to see booming spending before the industry shifts towards more customer-oriented used cases, benefiting Broadcom greatly. Valuation The key area of concern, as with all companies with a strong momentum, is the valuation. Looking at the valuation through a standard P/E ratio does not make much sense. As you can see below, the P/E ratio right now is at 73.7x its earnings, well above the average of its past 5 years. Instead, understanding the forward growth and how long the company can compound is the key. The analysts polled by S&P Global are forecasting the following growth in the next years: Expected EPS in FY24: $4.78, YoY growth of 13% Expected EPS in FY25: $6.00, YoY growth of 26% Expected EPS in FY26: $6.95, YoY growth of 16% The analysts' track record has always been rather conservative, with Broadcom delivering 60% of the time above their forecasts, while 40% of the time the company has hit the projections. As a result of the conservative EPS growth forecasts, Broadcom's forward P/E valuation is on the rather pessimistic side as well: Forward P/E FY24: 35.6x Forward P/E FY25: 28.3x Forward P/E FY26: 24.4x Yet, Broadcom's valuation implies a significantly lower premium compared to Nvidia's forward valuation (FY Adjusted): Forward P/E FY25: 48.3x Forward P/E FY26: 36.4x Forward P/E FY27: 31.3x And similarly to AMD's forward valuation: Forward P/E FY24: 51.7x Forward P/E FY26: 33.4x Forward P/E FY24: 24.7x From the data, we can see that Broadcom's valuation in fact carries the least premium in each of the subsequent years with the EPS growth already embedded inside of the forward valuation. I view Broadcom as one of the best AI plays money can buy today, carrying the least premium in relation to its peers while having a wide moat, a well-diversified portfolio of hardware and software, and sustainable EPS growth. I anticipate that Broadcom's shares will trade around $200 per share by the end of the year, implying an 18% upside from today's share price, boosted by stronger-than-expected AI-chip-related sales, reaching at least $13B by the end of FY24 with a positive momentum into FY25. Takeaway All in all, Broadcom is the 2nd best bet on the AI spending behind Nvidia. Even though only 25% of Broadcom's sales are generated by chips with AI applications, particularly its networking and accelerator chips, the company is seeing tremendous demand. The AI chips experienced 35% YoY sales growth in Q2, expected to keep growing in the following years as the AI spending booms and the generative AI industry grows at an unprecedented rate. The strong demand for AI chips, alongside the successful acquisition of VMware, helped Broadcom to diversify away from Apple's 20% sales dependency in the past 2 years while maintaining industry-leading profit margins. As with most companies with strong momentum, the valuation remains a challenge, yet I view Broadcom at today's price in relation to its forward EPS growth as reasonably priced with a BUY rating. With 30 years until retirement, as a Financial Analyst at a Fortune 500 firm, I'm strategically building a robust Growth Portfolio designed to fuel both capital appreciation and consistent dividend growth. My focus is on identifying companies with wide moats, sustainable competitive advantages, and reasonable valuations relative to their projected earnings growth across US and EU."Beyond mere yield chasing, dividend investing for me is about uncovering companies with robust free cash flow." Analyst's Disclosure: I/we have a beneficial long position in the shares of AVGO, NVDA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Broadcom Stock: One Of The Best Bets For AI Investment Theme (NASDAQ:AVGO)

I rate Broadcom as BUY, being one of the best AI companies money can buy today, with a share price target of $200 by the end of the year. Broadcom Inc. (NASDAQ:AVGO) has been one of the main beneficiaries of the AI investment narrative, ever since Chat-GPT's introduction in November 2022, showcasing to the world the power of generative AI solutions. Broadcom is a true example of a compounder at its finest. The company has a very healthy balance sheet with a triple-B rating from S&P Global and the stock is up 496% in a span of the last 5 years, thanks to its best-of-breed custom chips offering designed for specific needs of major companies like Apple (AAPL), Cisco Systems (CSCO) and Google (GOOGL). Partially helped by the 10:1 stock split effective as of 15th July, making the stock more accessible to a wider range of investors and employees, Broadcom is up 52% year-to-date, compared to less than 18% gain of S&P 500. The parabolic rise in the stock's price shouldn't scare you. Instead, it is well-supported by the improving fundamentals, with Broadcom's impressive operational efficiency, generating massive cash flow, while trimming unnecessary expenses. As a dividend growth investor in my heart, it's difficult to find a better place to be, than invested in Broadcom. Following the superb performance, the company offers a rather unattractive 1.2% dividend yield, however, in the last 10 years alone, the dividend grew by 1,540% with much more room for growth in the future supported by very effective capital allocation and benefiting from the AI booming spending. Broadcom's unique custom chip offering sets it apart from competitors such as Nvidia (NVDA), Intel (INTC), and Advanced Micro Devices (AMD) which offer predominantly one-fits-all solutions. This differentiation positions Broadcom exceptionally well as AI spending booms, unlocking major growth in its networking semiconductor sales. The company is no longer a bargain, trading at a Forward P/E of 35.6x for its FY24 forecasted earnings, well above its historical valuation standards, however, we need to be mindful of the new growth driver. Broadcom remains relatively cheaper compared to Nvidia and AMD, so what's next for the company and is it a good investment after its parabolic rise? The chances are you are already well-acquainted with Broadcom's business, thanks to its massive $791B market cap, placing it in the 10th spot in the market-weighted S&P 500 with 1.6% weight. However, in case you are not familiar, Broadcom is predominantly selling semiconductor hardware focusing on so-called, application-specific integrated circuits better known as (ASICS), or simply put custom chips. Custom chips are more of a niche product, compared to the GPUs sold by Nvidia which are one-size-fits-all in data centers, and that's precisely what makes Broadcom unique with a more diversified portfolio. The networking and wireless chips business segments are Broadcom's crown jewels responsible for its market-dominant position today with semiconductor sales representing 58% of its revenue during Q2 FY24. The custom chips, designed specifically to meet the unique needs of its customers, pose the risk of overreliance on a single customer. That used to be the case for Broadcom as well with its thin-film bulk acoustic resonator which the company is exclusively selling to Apple for iPhones, representing 20% of the chipmaker's revenue in 2023 and 2022. One can argue Apple's success of the last decade contributed to Broadcom's growth significantly. Over the years, Broadcom has built strategic partnerships with other major equipment vendors such as Arista Networks (ANET) and Cisco Systems. Even as Broadcom's business experiences organic growth, the majority of its past success can be attributed to strategic acquisitions of small and large firms alike, which helped to shape the portfolio and improve operational efficiency by cutting costs and streamlining its business. The company has proved to be a superb capital allocator with 30% ROE and 12% ROI in the past 5 years, well above the industry's averages. In order to tackle semiconductors and Apple's sales dependency, the company has been strategically acquiring companies in the infrastructure software space acquiring CA Technologies back in 2018, Symantec's security division in 2019, and as of 2023, the multi-cloud provider VMware for a staggering $61B. The acquisition of VMware should help to de-risk Broadcom's portfolio, bringing more balance with highly competitive software sales expected to reach up to 50% of the company's revenue over the medium term. Instead of chasing small deals, Broadcom is strategically targeting large enterprises and governments with its infrastructure software offerings as the switching costs tend to be much higher, ensuring lasting business partnerships. Naturally, moving forward, replicating similar top-line growth will be a challenging task thanks to its already substantial size. Yet, after the management has raised its forecast from an initial $50B, the revenue is expected to hit $51B in FY24, growing 39% YoY mostly thanks to the inorganic growth from VMware. Still quite conservative guidance in my opinion, however, the management has signaled more cost-cutting as initially expected for VMware, which should further help to expand, the already high margins. If we look at the Q2 FY24 earnings through a lens of organic growth instead, the revenue has grown by 12% YoY with AI sales being responsible for almost all of the growth. Broadcom is indeed seeing a positive shift with strong demand for networking chips, and AI accelerators used in generative AI infrastructure. The sales of AI Broadcom's AI chips increased 35% YoY, reaching $3.1B in Q2. The AI chips are now poised to reach $11B in sales this fiscal year, which would represent 25% of the company's sales. From my point of view, this is still quite a conservative estimate and management is being cautious in case the economy takes a turn, hindering the AI spending narrative by majors such as Google, Meta Platforms (META), and Microsoft (MSFT). If the bull case for AI persists, Broadcom is extremely well-positioned to keep benefiting from generative AI spending being the 2nd largest semiconductor company behind Nvidia. If Broadcom manages to keep the AI chips growth rate at around 35%, in the following fiscal year, the AI sales have the potential to account for more than 32% of the company's sales. However, let's not forget that for now Broadcom's 33% semiconductor sales come from non-AI applications and this area of business is under threat with sales falling 30% YoY, thanks to the cyclical downturn in the legacy economy, witnessed by other chip-makers alike. Analysts are forecasting the generative AI market could reach $1.3T by 2032, growing at a staggering annualized rate of 42%. The expectation is that AI infrastructure and large language model training are the key areas to see booming spending before the industry shifts towards more customer-oriented used cases, benefiting Broadcom greatly. The key area of concern, as with all companies with a strong momentum, is the valuation. Looking at the valuation through a standard P/E ratio does not make much sense. As you can see below, the P/E ratio right now is at 73.7x its earnings, well above the average of its past 5 years. Instead, understanding the forward growth and how long the company can compound is the key. The analysts polled by S&P Global are forecasting the following growth in the next years: The analysts' track record has always been rather conservative, with Broadcom delivering 60% of the time above their forecasts, while 40% of the time the company has hit the projections. As a result of the conservative EPS growth forecasts, Broadcom's forward P/E valuation is on the rather pessimistic side as well: Yet, Broadcom's valuation implies a significantly lower premium compared to Nvidia's forward valuation (FY Adjusted): And similarly to AMD's forward valuation: From the data, we can see that Broadcom's valuation in fact carries the least premium in each of the subsequent years with the EPS growth already embedded inside of the forward valuation. I view Broadcom as one of the best AI plays money can buy today, carrying the least premium in relation to its peers while having a wide moat, a well-diversified portfolio of hardware and software, and sustainable EPS growth. I anticipate that Broadcom's shares will trade around $200 per share by the end of the year, implying an 18% upside from today's share price, boosted by stronger-than-expected AI-chip-related sales, reaching at least $13B by the end of FY24 with a positive momentum into FY25. All in all, Broadcom is the 2nd best bet on the AI spending behind Nvidia. Even though only 25% of Broadcom's sales are generated by chips with AI applications, particularly its networking and accelerator chips, the company is seeing tremendous demand. The AI chips experienced 35% YoY sales growth in Q2, expected to keep growing in the following years as the AI spending booms and the generative AI industry grows at an unprecedented rate. The strong demand for AI chips, alongside the successful acquisition of VMware, helped Broadcom to diversify away from Apple's 20% sales dependency in the past 2 years while maintaining industry-leading profit margins. As with most companies with strong momentum, the valuation remains a challenge, yet I view Broadcom at today's price in relation to its forward EPS growth as reasonably priced with a BUY rating.

Nvidia and Broadcom Have Completed Their 10-for-1 Stock Splits, but Their Outlooks Differ Dramatically Over the Next 5 Years

It's a rare time to be an investor on Wall Street. While it's perfectly normal for a next-big-thing innovation, technology, or trend to be captivating investors' attention, having two trends vying for interest at the same time doesn't happen often. A stock split is an event that allows a publicly traded company the opportunity to alter its share price and outstanding share count. What's noteworthy about splits is that they're entirely cosmetic, with a company's market cap and operating performance being unaffected. Stock splits come in two varieties, forward and reverse, with investors undeniably favoring the former. With a forward-stock split, a company is purposely lowering its share price to make it more nominally affordable for retail investors and/or its employees. Comparatively, the goal of a reverse-stock split is to increase a publicly traded company's share price, often to ensure that it meets the minimum continued listing standards of a major stock exchange. The reason investors favor forward splits is because they're undertaken by highly innovative companies that consistently out-execute their peers. Since 2024 began, around a dozen high-profile businesses have announced a stock split. However, none were more anticipated than that of AI titans Nvidia (NASDAQ: NVDA) and Broadcom (NASDAQ: AVGO). Artificial intelligence leaders Nvidia and Broadcom became Wall Street's newest stock-split stocks Nvidia's board kicked things off on May 22, with the company announcing a 10-for-1 forward split, which became effective after the closing bell on June 7. This marked the sixth stock split for Nvidia since going public in January 1999. Not long after, on June 12, Broadcom's board made history by announcing its first-ever stock split, which coincidentally was also of the 10-for-1 variety. Broadcom's split went into effect after the close of trading on Friday, July 12, with shares trading at their split-adjusted price as of today, July 15. While there's natural excitement about a company's stock being more nominally affordable for everyday investors, artificial intelligence has been the driving force for both companies. Nvidia's claim to fame is its first-mover advantages with AI-graphics processing units (GPUs). In 2023, 98% of the 3.85 million AI-GPUs that were shipped came from Nvidia, according to semiconductor analysis firm TechInsights. The company's H100 GPU has become the go-to chip desired by businesses wanting to train large language models and run generative AI solutions. What's more, investors are excited about the future of Nvidia's AI-GPU architecture. The company's Blackwell platform, which offers accelerated computing improvements in a number of areas, including quantum computing and generative AI, is set to begin shipping to customers later this year. Meanwhile, in June, CEO Jensen Huang teased the release of the Rubin platform by 2026. As for Broadcom, it's quickly become the premier name in AI-driven networking solutions. It capitalized on the artificial intelligence hype last year by introducing its Jericho3-AI fabric in April 2023, which is able to connect up to 32,000 GPUs in AI-accelerated data centers. Jericho3 is a solution that's designed to maximize the compute capacity of GPUs -- something necessary for the split-second decision-making required of AI software and systems -- as well as reduce tail latency. Broadcom has also been a popular partner for some of the largest and most-influential tech companies, including infrastructure giant Dell Technologies and Alphabet, the parent company of internet search engine Google and cloud infrastructure service platform Google Cloud. Image source: Getty Images. Broadcom can run circles around Nvidia over the next five years Based on historical data from Bank of America Global Research that dates back to 1980, companies conducting forward-stock splits have averaged a 25.4% return in the 12 months following their announcement. This is more than double the average annual return of 11.9% for the benchmark S&P 500 over the comparable period. Statistically speaking, Nvidia and Broadcom would appear to be poised for more upside. But dig beneath the surface and you'll find a number of clear-cut reasons why Broadcom has the tools and intangibles to handily outperform Nvidia's stock over the coming five years. If there's a prevailing theme that makes Broadcom the far more-favorable stock to own in the coming years, it's history. Since the proliferation of the internet three decades ago, no next-big-thing innovation, technology, or trend has avoided a bubble-bursting event early in its existence. This is a roundabout way of saying that investors consistently overestimate the utility and/or adoption of new innovations and technologies, and artificial intelligence is unlikely to be the exception to this unwritten rule. The entirety of Nvidia's nearly $3 trillion increase in market value since the start of 2023 has come on the heels of its AI-GPUs and CUDA platform, which is a toolkit that helps developers build large language models. If the AI bubble were to burst at some point in the future, Nvidia's stock would probably be clobbered more than any other AI company. Although Broadcom has also enjoyed a sizable boost from AI, it's a considerably more-diversified company that would fare better if history were to rhyme. For example, Broadcom generates a notable percentage of its sales from wireless chips and accessories used in next-generation smartphones. It also makes optical components used in industrial equipment, networking solutions for newer automobiles, and cybersecurity solutions, to name a small number of its other ventures and sales channels. Whereas the bursting of the AI bubble would be damning for Nvidia, it wouldn't be an end-all for Broadcom. AVGO Dividend data by YCharts. Something else to consider is that Broadcom's rapidly growing dividend provides a safer foundation and, arguably, more mature investor base than Nvidia. Even with Nvidia recently increasing its quarterly payout by 150% to $0.01 per share on a post-split basis, the company's token yield is only 0.03%. Comparatively, Broadcom's quarterly payout has catapulted higher by 7,400% since late 2010. Whereas the company had previously been pacing a $0.28 base annual payout, Broadcom is now on track to dole out a cumulative $21/share annually to its investors. This is good enough for a 1.2% yield, and it demonstrates how consistent Broadcom's growth in operating cash flow has been since the end of the Great Recession. The final reason Broadcom can handily outperform Nvidia in the return column over the next five years is their respective valuations. Nvidia's trailing-12-month (TTM) price to sales (P/S) ratio recently topped 40. This effectively matches the TTM P/S peaks witnessed prior to the dot-com bubble bursting from the likes of Amazon and Cisco Systems. Although Broadcom's TTM P/S ratio of 19 is considerably higher than its average of 5 to 7 times sales over much of the last decade, it'll have a much easier time growing into its current valuation than Nvidia. Between Wall Street's two premier stock-split stocks, Broadcom looks to be a smarter long-term investment than Nvidia. The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now... and Nvidia wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $791,929!* Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Alphabet, Amazon, and Bank of America. The Motley Fool has positions in and recommends Alphabet, Amazon, Bank of America, Cisco Systems, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.