I totally get it. We all want to find the “new” Nvidia (NASDAQ:NVDA). Since Broadcom (NASDAQ:AVGO) is an AI hardware company, some see it as the newest “new Nvidia.” It is risky to invest in the latest shiny metal object, so I cannot recommend Broadcom stock.
I won’t win any popularity contests for this controversial take. Yet, my instinct is to zag when the crowd zigs. Broadcom is a great company in a red-hot industry, but the market knows this. Investors also know about its upcoming share split, so let’s tackle that topic without further ado.
Broadcom Joins the Stock Split Club
Nvidia recently had its stock split, and soon Broadcom will enact a 10-for-1 share split. I’m not directly saying that Broadcom is copying Nvidia, but the timing is certainly interesting.
Stock traders went bananas and catapulted the Broadcom stock price after the company’s share-split announcement. Granted, they were also celebrating Broadcom’s second-quarter fiscal 2024 results, which indicated 43% year-over-year revenue growth.
Broadcom President and CEO Hock Tan cited “AI demand” as a main driver of the company’s quarterly results.
So, if you’re going to invest in Broadcom, you’d better hope that the demand for AI hardware continues to grow at a blistering pace, which is what the market seems to expect now.
In any case, Broadcom stock will trade on a split-adjusted basis on July 15. So, the billion-dollar question is whether investors should load up on Broadcom shares before the split.
If It’s ‘Sure-Fire,’ Avoid It Like the Plague
“It’s a sure-fire way to send your stock soaring,” Triple D Trading analyst Dennis Dick remarked about Broadcom’s share-split announcement. Dick added that this move was “right out of Nvidia’s book.”
Maybe I’m just a stubborn old contrarian, but I’m skeptical of anything that’s considered “sure-fire” in the financial markets. That type of language makes me want to run for the hills.
The market’s overwhelming sense of optimism just makes my skin crawl. JPMorgan Chase analysts are already signaling that Broadcom can “dominate” the high end of the market for custom chips.
Bernstein analyst Stacy Rasgon is calling Broadcom the “second best AI story in the space” (second to Nvidia, of course).
Practically across the board, analysts are using what I call a “raise-and-praise” approach. They’re scrambling to raise their price targets on Broadcom stock and heap effusive praise upon the company.
Let’s never forget that the market is ultraefficient and forward-looking. By now, any benefits from the highly anticipated stock split have already been factored into the Broadcom share price. There’s no point in trying to front-run other stock traders at this point, because you’ll only end up chasing and sooner or later, chasers get punished.
Just to quantify my point, note that Broadcom’s GAAP-measured trailing 12-month price-to-earnings (P/E) ratio is 72.92x. That’s substantially higher than the sector median P/E ratio of 30.5x.
Broadcom Stock: Take the Money and Run
My point here is that Broadcom is already very richly valued and the market is fully aware of the upcoming stock split. It’s not as if traders are going to sit around and wait for the event to happen. They already loaded up on Broadcom shares in anticipation of the event.
Don’t get the wrong idea. Broadcom is a good company in a red-hot tech-hardware industry. But again, the market already knows this.
So, don’t get caught chasing Broadcom stock after a massive rally. If you happen to own shares and are in a profitable position, today’s a great day to “take the money and run.” Then, wait for a share-price pullback of at least 20% before you consider reinvesting in Broadcom.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
