AI is fueling demand for this semiconductor stock.
Shares of Broadcom (AVGO -7.60%) climbed 43.8% in the first six months of the year, according to data provided by S&P Global Market Intelligence. Investors reacted to strong quarterly earnings driven by demand for hardware supporting artificial intelligence (AI) applications. That trend lifted several semiconductor stocks during the first half of 2024. Investors also seemed pleased with Broadcom’s stock split, which was announced in June.
Broadcom helped to lead the charge for AI semiconductor stocks
AI stocks have serious momentum, and semiconductors have been a popular focus for that trend in 2024. Microchip makers struggled in 2023 due to weakness in the automotive and consumer electronics markets. Many of the largest semiconductor companies struggled with weak sales volume and unit prices. Fortunately, AI software applications often require high-performance hardware to function properly, resulting in higher-than-expected demand for new-generation semiconductors.
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Broadcom was one of the biggest beneficiaries of that catalyst. Its performance closely tracked the iShares Semiconductor ETF throughout early 2024, illustrating the persistent industrywide momentum.
Broadcom boasted impressive financial results to support the stock’s momentum. It beat Wall Street forecasts for revenue and earnings in its March quarterly report. Sales rose 34% in the quarter, resulting in nearly $4.7 billion in free cash flow, which was an impressive 39% of revenue. The company increased its full-year revenue guidance based on strong demand for AI chips. Those are impressive results for a company that’s still struggling with cyclical issues in one of its major business units.
Broadcom’s June report was even better. The company accelerated to 43% revenue growth, smashing analyst expectations. Its free-cash-flow margin declined slightly, but it still managed to deliver impressive cash flows and wide profit margins. The strong results attracted investor attention, sending the stock’s forward P/E ratio above 28.
The market seemed to love Broadcom’s stock split
Broadcom also announced an upcoming stock split during its June financial report. Its share price had risen above $1,700, and the company executed a 10-for-1 stock split that significantly reduced its price per share.
In theory, splits shouldn’t impact a company’s valuation. They don’t change anything about the underlying company’s sales, profits, or cash flows. When a split occurs, holders should have 10 times as many shares, but each share should be worth one-tenth of their previous value.
However, there’s historical precedent for valuations climbing higher after splits. Nvidia is a noteworthy recent example. Lower share prices can improve liquidity by making them more accessible to retail investors. The wide availability of fractional shares should dull this effect, but it’s a potential demand catalyst in the eyes of many. Splits usually occur when a company’s strong performance causes share prices to spike, so they tend to coincide with momentum. The self-fulfilling potential could be enough to spark urgency or positive attention for people who want to participate in a news-driven rally.
Ryan Downie has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and iShares Trust – iShares Semiconductor ETF. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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