4 Reasons to Buy This AI Leader After the Stock Split

Key Points

• Broadcom is a leading networking and infrastructure semiconductor company that underwent a 10-for-1 stock split.
• Broadcom is experiencing strong demand for customer AI chips.
• Broadcom raised its full-year 2024 revenue guidance after beating its Q2 2024 top and bottom line estimates.

Leading semiconductor company Broadcom Inc. NASDAQ: AVGO underwent a 10-for-1 stock split on July 12, 2024. Predictably, its shares surged upon announcing the split and ran into the actual split. Shares have since pulled back 17% off its highs and could present a buying opportunity for investors waiting for pullbacks on chip companies.

Broadcom has been a benefactor of the artificial intelligence (AI) boom in the computer and technology sector. With a strong roster of the world’s largest hyperscalers as customers, its runway as an AI leader is long and may just be starting. Here are 4 reasons to buy Broadcom shares after the stock split.

1) Broadcom is Growing Its Niche With Custom AI Chips

While NVIDIA Co. NASDAQ: NVDA dominates the general-purpose AI chip segment, Broadcom is finding its niche in custom AI chips. Broadcom is a leader in application-specific integrated circuits (ASICs), which are becoming more in demand for specific AI applications. OpenAI has held talks with Broadcom to design custom AI chips. Broadcom has worked with Alphabet Inc. NASDAQ: GOOGL and Meta Platforms Inc. NASDAQ: META on customer ASIC AI accelerators. Since Broadcom already has major existing clients using its wares, it makes it easier to upsell them on AI chips.

Broadcom built its moat, specializing in high-speed networking and wireless chips. It's a leading supplier of networking components, including Ethernet switches and routers, with a heavy concentration on data center infrastructure and connectivity. Its wireless chips are essential for 5G, Wi-Fi and Bluetooth connectivity. They can be found in Apple Inc. NASDAQ: AAPL products, including iPhones, laptops, desktops, tablets and mobile devices.

2) Broadcom Generates Industry Leading Margins    

Broadcom has a gross profit margin of 74.24%. This is higher than the semiconductor industry median of 48.75%. While NVIDIA has a higher gross profit margin at 78.4%, they actually lowered their fiscal second-quarter 2025 gross profit margin by 235 to 335 bps. Many analysts believe this may be the start of margin contraction after increasing 1,380 bps YoY since its fiscal Q1 2024.

Broadcom's revenues surged 43% YoY in Q2 2024, thanks to the AI boom. Broadcom also indicated that its non-AI revenues may have bottomed in the second quarter and should rebound modestly in the second half of the year. AI products generated a record $3.1 billion in Q2 2024. AI-driven demand was so strong the company had to raise its full-year 2024 revenue guidance to $51 billion, up from $50 billion. Consensus estimates were at $50.58 billion.

3) Broadcom is Riding the Data Center Boom

Broadcom’s products cater to data centers. They provide the essential networking components, storage controllers, processing power with custom AI chips and infrastructure software. The higher operating and processing power needs of next-gen AI data centers fall right into its wheelhouse. Its infrastructure software revenue continues to accelerate with the adoption of its VMWare software stack. Broadcom’s ethernet solutions are used in 7 of the 8 largest AI clusters that are currently in deployment.

4) AVGO Completed its Earnings Gap Fill to Solidify Support    

AVGO stock gapped up from $150.58 to $165.25 after the company's strong Q2 2024 earnings report. The company not only beat top and bottom line estimates but also raised its full-year 2024 revenue guidance. Additionally, it announced a 10-for-1 stock split. This triggered a buying frenzy that surged its shares to an all-time high of $185.16 in the following days.

The daily candlestick chart on AVGO has a descending triangle pattern. The upper descending trendline commenced at the $185.18 peak on June 18, 2024, capping the lower highs towards the flat-bottom lower trendline support and gap fill at $150.58. While AVGO attempted to break through the falling upper trendline for 8 days, it was pulled back under once the $165.28 gap-fill support broke.

This sent shares down towards the lower gap fill at $150.58, which it completed on July 25, 2024. The earnings gap fill has been completed by filling the earnings upper and lower price gaps at $165.25 and $150.58. It's like filling in a hole with cement, making the ground more solid. AVGO may bounce from here.

The daily relative strength index (RSI) is attempting to bounce at the 42-band. Pullback support levels are at $150.58, $146.50, $140.40 and $135.58.