Friday, 14 June 2024

Why Broadcom Stock Blasted Higher on Thursday

by BD Banks

Shares of Broadcom (NASDAQ: AVGO) surged higher on Thursday, jumping as much as 16.1%. As of 11:41 a.m. ET, the stock was still up 13.2%.

The catalyst that sent the semiconductor specialist higher was robust artificial intelligence (AI) results and a stock split.

A big boost from AI

In the second quarter, Broadcom generated revenue that rose 43% year over year to $12.5 billion, driving adjusted earnings per share (EPS) to $10.96, an increase of 6%. The company noted that the results got a boost from AI, as hyperscale cloud customers continued to upgrade to next-generation technology capable of powering AI.

Analysts’ consensus estimates were expecting revenue of $12.03 billion and EPS of $10.84, so Broadcom easily surpassed both benchmarks.

The results were driven higher by strong demand for generative AI, as revenue from AI products climbed to $3.1 billion — a record — and totaling 25% of Broadcom’s total revenue.

What’s good for the goose…

Perhaps most intriguing for shareholders was the announcement that Broadcom was following in Nvidia‘s footsteps, revealing its own 10-for-1 stock split. Management said the purpose of its stock split was “to make ownership of Broadcom stock more accessible to investors and employees.” Since Nvidia announced its stock split on May 22, the stock has climbed 35%, so Broadcom investors are hoping for a similar boost.

Shareholders of record at the market close on July 11 will receive an additional nine shares for each share of Broadcom stock they own. The newly minted shares will be disbursed after the market close on July 12, and the stock will begin trading on a split-adjusted basis when the market opens on July 15.

The adoption of AI continues to gain ground. While no one knows for sure how big it will be, estimates suggest the size of the generative AI market could be between $2.6 trillion and $4.4 trillion in the coming years, according to global management consulting firm McKinsey & Company.

Broadcom is currently trading for 31 times forward earnings, which is a pretty reasonable price to pay for a company providing critical infrastructure for the AI revolution.

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Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.