This stock is a bargain despite recent gains.
The rise of artificial intelligence (AI) has led to massive stock gains for some companies. In a few cases, the increase was so significant that it prompted a company to initiate a stock split.
Admittedly, the stock split may have happened for a variety of reasons, including an attempt to avoid the appearance of overvaluation. Nonetheless, when accounting for factors such as the business, growth rates, and valuation, one stock-split stock stands out as an excellent buy.
The stock-split stock to buy
The stock-split stock in AI to buy right now is Broadcom (AVGO -4.46%). The company recently initiated its first stock split in its history, splitting shares 10-for-1.
Still, the 9,200% growth in the stock price since its 2009 initial public offering (IPO) likely justified such a split. Investors should also note that this increase does not include dividend payments, and the payout growth is so significant that today’s annual dividend of $2.10 per share is 40% above the split-adjusted IPO price of $1.50 per share.
Today’s Broadcom is made up of its original semiconductor services segment, though a series of acquisitions means that more than 40% of its revenue now comes from its infrastructure software segment.
However, both segments make extensive use of AI. Broadcom’s semiconductor segment supports other enterprises directly, employing engineers near its largest clients and collaboratively developing chips to solve its clients’ problems. Today, such problem-solving capabilities call for AI.
AI also plays a role in Broadcom’s enterprise software business. Its AIOps applies AI and machine language to data monitoring. From there, it can deliver insights from data coming from various sources, which could improve digital experiences for partners, employees, and customers.
Broadcom’s financial advantages
Despite such benefits, shareholders need to put Broadcom’s finances into perspective. In the first two quarters of fiscal 2024 (ended May 5), its revenue of $24 billion rose 39%, a growth rate boosted by AI and its purchase of software virtualization company VMware in November.
Nonetheless, Broadcom’s net income dropped 52% in the first six months of fiscal 2024 to $3.4 billion. The company dramatically increased its spending on research and development, probably to improve its AI capabilities. Selling, general, and administrative expenses also spiked, likely because of the costs of acquiring VMware. Hence, spending on operating expenses was more than $10 billion during that time, an increase of 152%.
Such costs are long-term investments in the future growth of the company, which should have a positive impact on profits eventually. Investors appeared to agree, and the stock rose 68% over the last year, increasing its need for a stock split.
So why not Nvidia?
Still, some might see Nvidia as the stock-split stock of choice, especially given its dominance in the AI chip market. Additionally, Nvidia’s P/E ratio of 66 is only marginally higher than Broadcom’s 65 earnings multiple, a P/E ratio increased by the recent drop in profits.
However, the overvaluation is more obvious when looking at other measures. Nvidia sells at a price-to-sales (P/S) ratio of 35, compared to 16 for Broadcom.
The contrast is even more stark when measured by the price-to-book value ratio. Broadcom sells at 10 times its book value. While that is not cheap, it is far lower than Nvidia, which trades at a staggering 56 times its book value. That may mean any growth slowdown could lead to a massive pullback in its stock.
Consider Broadcom stock
Ultimately, investors looking for a stock-split stock in the AI industry may struggle to do better than Broadcom. Thanks to its semiconductor and software businesses making extensive use of AI, the stock has experienced a surge so massive that it finally led to its 10-for-1 stock split.
Although the company has sacrificed short-term profits to invest in itself, the rapidly rising revenue shows Broadcom remains on a growth trajectory.
Moreover, while Nvidia may hold the technical lead in AI, the valuations measured in sales or book value show the extent to which Nvidia has become overvalued. Such a comparison shows Broadcom as a bargain with potentially more unrealized growth potential.
Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
