Beginning with Monday’s opening bell, Broadcom (NASDAQ:AVGO) stock began trading at its new slimmed-down price of just under $170 a share. Following its 10-for-1 stock split on July 12, the artificial intelligence chipmaker was now available for a more affordable price.
Investors, though, weren’t rushing in. Where smartphone chipmaker’s daily volume over the first 10 trading days of July averaged over 38 million shares, yesterday’s volume stood at 22.8 million shares.
Was it just the stock split that caused investors to be reticent? Or are they concerned about a coming slowdown? Wall Street only sees a potential 10% gain in Broadcom stock over the coming year.
Yet the longer term certainly seems bright for the chipmaker, which is why I’m bullish on a post-split AVGO stock for the next five years.
An AI-Powered Rocket
For every share of Broadcom stock investors owned on Friday, they received nine additional shares. At the same time, the stock went from around $1,700 down to $170.
The stock split changed nothing about the underlying fundamentals of AVGO but the stock market often interprets stock splits to be a bullish signal.
Broadcom stock is up 53% in 2024 and has nearly doubled over the past 12 months. Over the last three years, shares are up 260%.
The driving factor in the rise, of course, has been the advent of artificial intelligence. It is powering the entire tech sector to new heights.
Technology stocks have been among the best-performing stocks for the past few years and have largely been responsible for driving the market indexes to record levels since the pandemic.
Although Broadcom is best-known for its smartphone silicon that is found in all major handsets today, especially from Apple (NASDAQ:AAPL), its largest customer.
Even though Apple dropped a key Broadcom chip last year in favor of one it designed itself, the consumer electronics product giant remains a large, important customer.
Yet the chipmaker is bringing in a new type of customer now.
Heading in a New Direction
Although Broadcom will remain the leading mobile chip stock, it has widened its lens to go after the data center market.
It developed custom computer, switch and networking chip technologies that were optimized for AI-powered data center applications. As more hyperscalers demand greater complex computing algorithms, the data centers need silicon that can handle the heightened workload.
Both Alphabet (NASDAQ:GOOG, GOOGL) and Meta Platforms (NASDAQ:META) are customers for Brodcom’s AI application-specific integrated circuits. They are likely attracted by the chipmaker’s lower cost and energy efficiency.
Sales of Broadcom’s AI chips is so great that AI will account for 35% of all semiconductor sales. Last year the chipmaker said AI chips represented 15% of the total. It expects AI chips will bring in $11 billion in revenue this year.
Now What?
Earlier this year analysts expected a slowdown in the AI market to hit technology stocks. That has yet to pan out as Nvidia (NASDAQ:NVDA) and Taiwan Semiconductor Manufacturing (NYSE:TSM) continue to report strong growth.
Same with Broadcom, with almost all of its 12% organic sales growth coming from AI. Those AI chips AI grew about 35% sequentially to $3.1 billion. It would not be surprising to see it easily surpass management’s seemingly conservative guidance.
The growth from its AI accelerators and enterprise networking chips is upending its non-AI chip business, which saw a 30% decline in sales.
And therein lies the risk with Broadcom stock. Companies will want to see a payoff on their investment in AI. Whether it is superior returns on investment, greater cost efficiencies or some other tangible result, it will determine the growth market for AI chips and Broadcom.
Right now, the chipmaker is capitalizing on the demand. Its pivot to generative AI infrastructure was prescient and smart.
Although Broadcom stock looks relatively expensive at 28 times next year’s earnings and four times sales, it is experiencing substantial growth to justify the premium. That makes AVGO a good pick for a long-term buy-and-hold investment.
On the date of publication, Rich Duprey did not hold (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.
