In recent months, stock splits have stirred up a lot of excitement in an already effervescent bull market. Companies in a wide variety of industries, from retail to technology, have launched these splits to bring down the prices of their shares after a long period of gains. Investors generally applaud stock splits because a lower per-share price makes it easier for a wider range of buyers to get in on the investment opportunity.
Technology giant Broadcom (NASDAQ: AVGO) is the latest to join the list of exciting stock-split players such as Nvidia and Chipotle Mexican Grill. The semiconductor and networking company completed its 10-for-1 split on July 12, and the shares began trading on a split-adjusted basis on July 15. Today, each share trades for about $170, versus $1,600 just a few weeks ago.
Broadcom stock, even at its high per-share price tag, climbed more than 40% in the first half of the year, adding to a triple-digit three-year gain. Now the question is, at its new lower price, what will the stock do next? Let's look to history for some clues.
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A look at stock splits
First, a quick note on stock splits, in general. A stock split involves the issuance of additional shares -- the number determined by the ratio of the split -- to current shareholders. This, as mentioned, lowers the share price -- but it doesn't change anything fundamental about the company. Even though the price of one share is lower, the move doesn't impact the market value of the company, the value of your holding, or the stock's valuation.
This means stock splits aren't reasons to buy or sell a particular stock. Instead, they're simply mechanical moves to adjust per-share prices.
That said, they can be seen as positive for a company because they make it easier for smaller investors to get in on a particular stock without relying on fractional shares. Stock splits also suggest the company is confident about its future and the likelihood that the stock, from its new lower price, could soar once again.
What does history tell us about what Broadcom stock may do following its recent split? Over time, companies that perform splits have shown market-beating performance in the 12 months following the announcement of a split. Historically, stock-split players have delivered an average total return of more than 25% over this period, compared to a return of just under 12% for the S&P 500, according to Statista, citing Bank of America's Research Investment Committee data.
This doesn't mean investors are buying just because these companies split their stocks. Instead, these companies' solid long-term outlooks may have attracted investors -- and the new, lower per-share price has made it easier for more of these buyers to add the particular stock to their portfolios.
Is Broadcom heading higher or lower?
All of this suggests Broadcom could be headed for more gains in the months to come, which is great news if you already hold the stock or are thinking of buying right now. Of course, it's important to remember that history doesn't always repeat itself. It's impossible to predict the performance of any given stock with 100% accuracy. The market and individual stocks could surprise investors negatively or positively at any time.
This is why it's key to look ahead and consider whether a particular stock has what it takes to excel over the coming five to 10 years instead of focusing on short-term performance. If it does, now could be a great time to get in on that player.
So is Broadcom a solid long-term buy? The company is benefiting from the high-growth area of artificial intelligence (AI), but it isn't entirely dependent on it. It's also generating impressive growth from its recent acquisition of cloud software business VMware and is well diversified, selling thousands of products used in areas from data center networking to home connectivity and factory automation.
All of this makes Broadcom, trading at 36x forward earnings estimates, a buy today -- whether it follows history's lead and soars over the coming 12 months or not.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Chipotle Mexican Grill, and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
