Since 1980, companies saw average share price appreciation of 25.4% during the year following a stock split announcement, according to Bank of America. We can apply that statistic to Broadcom (NASDAQ: AVGO) to make an education guess about its future performance.
Specifically, Broadcom announced a 10-for-1 stock split after the market closed on June 12. Its share price has increased 3% since the market opened the following day, leaving implied upside of roughly 22% through June 2025.
Of course, past performance is never a guarantee of future returns. Whether Broadcom shares trade higher or lower in the coming months depends on the company's financial results and how investors value the stock. So, let's take a closer look at what Broadcom does and what Wall Street expects from the company. Here's what investors should know.
Broadcom is a leader in networking chips and custom silicon
Broadcom splits its business into two segments: semiconductor solutions and infrastructure software. The company earns semiconductor revenue from multiple end markets, including wireless devices, data center networking equipment, and storage systems. Broadcom also designs application-specific integrated circuits (ASICs), a term referring to bespoke silicon like custom artificial intelligence (AI) accelerators.
Likewise, Broadcom earns software revenue from several end markets, including cybersecurity and mainframe software. The former includes solutions for endpoint, network, and identity security, and the latter includes solutions for observability, data management, and workflow automation. Beyond that, Broadcom's recent acquisition of VMware added virtualization software to its portfolio.
Broadcom is a leader in several markets, including ASICs and networking chips, as well as mainframe and virtualization software. But its strong presence in certain semiconductor verticals is particularly relevant because demand for AI infrastructure should be a major catalyst. For instance, JPMorgan analysts estimate Broadcom holds 80% share in Ethernet switch chips, and that market is expected to compound at 20% to 30% annually over the next few years.
Additionally, Broadcom dominates the market for high-end ASICs with 55% to 60% market share, according to Barron's. The company has helped Alphabet's Google develop custom machine learning chips called Tensor Processing Units (TPUs) since 2013, and it has helped Meta Platforms build custom AI chips called Meta Training and Inference Accelerators (MTIAs) since 2020 .
However, custom AI chip sales should grow faster in the coming quarters because Broadcom recently won three new clients. One is still unknown, but JPMorgan analysts have identified the others as TikTok parent ByteDance and OpenAI. That bodes well for the company and its shareholders. AI accelerator sales are projected to increase at 29% annually through 2030, according to Grand View Research.
As a caveat, Broadcom has a strong presence in several fast-growing markets like AI chips and virtualization software, but it also competes in several slow-growing markets with its non-AI chips and mainframe software. As a result, Broadcom is growing more slowly than other AI chipmakers. Total revenue increased 47% in the most recent quarter, but that figure drops to 4% when the contribution from VMware is excluded.
Broadcom's stock trades at a reasonable valuation
Wall Street is generally bullish on Broadcom. The stock carries a median price target of $195 per share, which implies 13% upside from its current share price of $172. Goldman Sachs analysts recently wrote, "Alongside Nvidia, we view Broadcom as a critical piece to the ongoing AI infrastructure build-out." Bank of America analysts echoed that opinion, adding that Broadcom could upsell VMware to enterprise customers running AI workloads.
Going forward, Wall Street expects Broadcom's earnings to grow at 22% annually through 2025. That makes its current valuation of 38 times earnings look fair. Broadcom is a good choice for patient investors in search of a reasonably priced semiconductor stock that should benefit as demand for AI infrastructure increases in the coming years. As always, it would be prudent to start with a small position and build it over time.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Bank of America, Goldman Sachs Group, JPMorgan Chase, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Broadcom Stock Split Update: Up 3% Since June, History Says the AI Stock Will Do This Next was originally published by The Motley Fool