Wall Street's latest artificial intelligence (AI) stock split could deliver markedly different returns for investors over the next half-decade.
This is a rare time to be an investor on Wall Street. While it's perfectly normal for the next big innovation, technology, or trend to be the focus of investors' attention, it's not often that there are two trends of interest at the same time.
Although artificial intelligence (AI) is the main catalyst that has sent the famous. Dow Jones Industrial Averagebroad-based S&P 500and focused on growth Nasdaq Composite Stock dividend euphoria has also played a key role, reaching record closing highs in 2024.
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A stock split is an event that allows a publicly traded company to change its share price and the number of shares outstanding. What is noteworthy about the divestitures is that they are purely cosmetic, with the company's market cap and operating performance unaffected.
Stock splits come in two types, forward and reverse, with investors undoubtedly favoring the former. With a forward stock split, a company is intentionally reducing the price of its shares to make them more nominally affordable for retail investors and/or its employees. By contrast, a reverse stock split aims to increase the share price of a publicly traded company, often to ensure that it meets the minimum ongoing listing standards of a major stock exchange. comes down
The reason investors favor forward splits is that they are initiated by highly innovative companies that consistently outperform their peers.
Since the start of 2024, nearly a dozen high-profile businesses have announced stock splits. However, no one was more predictable than the AI Titans. Nvidia (NVDA 1.44%) And Broadcom (AVGO -0.31%).
Artificial intelligence leaders Nvidia and Broadcom became Wall Street's latest stock split
Nvidia's board kicked things off on May 22, with the company announcing a 1-for-1 forward split, effective after the closing bell on June 7. This was the sixth stock split for Nvidia since going public in January 1999.
Shortly thereafter, on June 12, Broadcom's board made history by announcing its first stock split, which coincidentally was also of the 1-for-1 type. The Broadcom split took effect after the close of trading on Friday, July 12, with shares trading at their price-adjusted value as of today, July 15.
While there is natural excitement about the company's stock becoming more nominally affordable for everyday investors, artificial intelligence has been a driving force for both companies.
Nvidia's claim to fame is its first-mover advantages with AI-graphics processing units (GPUs). According to semiconductor analysis firm TechInsights, in 2023, 98% of the 3.85 million AI-GPUs shipped came from Nvidia. The company's H100 GPU has become the go-to chip desired by businesses looking to train large language models and run generative AI solutions.
Moreover, investors are excited about the future of Nvidia's AI-GPU architecture. The company's Blackwell platform, which offers rapid computing improvements in a number of areas including quantum computing and generative AI, is set to begin shipping to customers later this year. Meanwhile, in June, CEO Jensen Huang teased the release of the Rubin platform by 2026.
As for Broadcom, it has quickly become the biggest name in AI-powered networking solutions. It leveraged artificial intelligence last year in April 2023 by introducing its Jericho3-AI fabric, capable of connecting up to 32,000 GPUs in AI-accelerated data centers. Jericho3 is a solution designed to maximize the compute capacity of GPUs — essential for the split-second decision-making required by AI software and systems — while minimizing tail latency. .
Broadcom has also been a popular partner for some of the largest and most influential tech companies, including infrastructure giants. Dell Technologies And the alphabetparent company of Internet search engine Google and cloud infrastructure service platform Google Cloud.
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Broadcom could run circles around Nvidia over the next five years.
Based on historical data from Bank of America According to Global Research, which dates back to 1980, companies that do forward stock splits have averaged a 25.4% return in the 12 months following their announcement. That's more than double the benchmark S&P 500's average annual return of 11.9% over the comparable period. According to statistics, Nvidia And Broadcom appears poised for further upside.
But dig beneath the surface and you'll find plenty of obvious reasons why Broadcom has the tools and intangibles to easily outperform Nvidia stock over the next five years.
If there's a prevailing theme that makes Broadcom a more favorable stock in the coming years, it's history. Since the rise of the Internet three decades ago, no next big innovation, technology, or trend has avoided a bubble-bursting event early in its existence. This is a roundabout way of saying that investors consistently overestimate the utility and/or adoption of new innovations and technologies, and artificial intelligence is unlikely to be an exception to this unwritten rule.
Nvidia's market value has grown by nearly $3 trillion since the start of 2023 thanks to its AI-GPUs and CUDA platform, a toolkit that helps developers build large language models. If the AI bubble bursts at some point in the future, Nvidia's stock will probably close more than any other AI company.
Although Broadcom has also received a massive boost from AI, it's a far more diverse company that would be better off if history rhymes. For example, Broadcom generates a significant percentage of its sales from wireless chips and accessories used in next-generation smartphones. It also makes optical components used in industrial equipment, networking solutions for new automobiles, and cybersecurity solutions, to name a small number of its other ventures and sales channels. While the bursting of the AI bubble will be damaging for Nvidia, it won't be all over for Broadcom.
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Something else to consider is that Broadcom's rapidly growing profits provide a safer base and, arguably, a more mature investor base than Nvidia's. Even after Nvidia recently increased its quarterly payout by 150% to $0.01 per share on a post-dividend basis, the company's token yield is only 0.03%.
By comparison, Broadcom's quarterly payout has grown 7,400 percent since the end of 2010. Where the company was previously paying $0.28 per share annually, Broadcom is now on track to pay its investors $21/share annually. That's good enough for a 1.2% yield, and shows how consistent Broadcom's growth in operating cash flow has been since the end of the Great Recession.
The final reason Broadcom should easily outpace Nvidia in the return column over the next five years is their relative valuations. Nvidia's trailing 12-month (TTM) price-to-sales (P/S) ratio recently topped the 40s. This effectively matches the TTM P/S peaks seen before the dot-com bubble Amazon And Cisco Systems.
Although Broadcom's TTM P/S ratio of 19 is well above its average 5 to 7 times sales for most of the past decade, it will have a much easier time increasing its current valuation than Nvidia.
Between two of Wall Street's premiere stock splits, Broadcom looks like a smarter long-term investment than Nvidia.
John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of The Motley Fool, an Amazon subsidiary. Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's board of directors. Bank of America is the advertising partner of The Motley Fool Company. Sean Williams has positions at Alphabet, Amazon and Bank of America. The Motley Fool has positions in and recommends Alphabet, Amazon, Bank of America, Cisco Systems and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a Disclosure Policy.