Nvidia and Broadcom have completed their 10-for-1 stock splits, but their outlooks change dramatically over the next 5 years

It’s a rare time to be an investor on Wall Street. While it’s perfectly normal for one big innovation, technology or trend to grab the attention of investors, having two trends competing for interest at the same time doesn’t happen often.

Although artificial intelligence (AI) is the main catalyst that has sent the icon Dow Jones Industrial Averagebroad based S&P 500and focused on growth Nasdaq Composite at record closing levels in 2024, stock split euphoria has also played a key role.

A stock split is an event that allows a publicly traded company the ability to change its stock price and the number of shares outstanding. What’s worth noting about splits is that they are entirely cosmetic, with a company’s market cap and operating performance unaffected.

Stock splits come in two varieties, forward and reverse, with investors undeniably favoring the former. With a future stock split, a company is intentionally lowering the share price to make it nominally more affordable for retail investors and/or its employees. By comparison, the purpose of a reverse stock split is to increase the stock price of a publicly traded company, often to ensure that it meets minimum ongoing listing standards on a major stock exchange.

The reason investors favor future splits is because they are undertaken by highly innovative companies that consistently outperform their peers.

Since the start of 2024, about a dozen high-profile businesses have announced stock splits. However, none was more anticipated than that of the AI ​​titans Nvidia (NVDA -0.88%) AND Broadcom (AVGO 1.15%).

Artificial intelligence leaders Nvidia and Broadcom became Wall Street’s newest stocks split from stocks

Nvidia’s board kicked things off on May 22, with the company announcing a 10-for-1 forward split that became effective after the closing bell on June 7. This marked Nvidia’s sixth stock split since going public in January 1999.

Not long after, on June 12, Broadcom’s board made history by announcing its first stock split, which coincidentally was also of the 10-for-1 variety. Broadcom’s split became effective after the close of trading on Friday, July 12th, with shares trading at their split-adjusted price as of today, July 15th.

While there is a natural excitement about a company’s stock being nominally more affordable for everyday investors, artificial intelligence has been the driving force for both companies.

Nvidia’s claim to fame is its first edge with AI graphics processing units (GPUs). In 2023, 98% of the 3.85 million AI-GPUs shipped came from Nvidia, according to semiconductor analysis firm TechInsights. The company’s H100 GPU has become the primary chip desired by businesses looking to train large language models and run generative AI solutions.

Additionally, investors are excited about the future of Nvidia’s AI-GPU architecture. The company’s Blackwell platform, which offers accelerated 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 launch of the Rubin platform by 2026.

As for Broadcom, it has quickly become the leading name in AI-driven networking solutions. It capitalized on the artificial intelligence buzz last year by introducing its Jericho3-AI fabric in April 2023, which is capable of connecting up to 32,000 GPUs in AI-accelerated data centers. Jericho3 is a solution that is designed to maximize the computational capacity of GPUs—something necessary for the split-second decision-making required by AI software and systems—as well as reduce end-to-end latency.

Broadcom has also been a well-known partner to some of the biggest and most influential tech companies, including the infrastructure giant Dell Technologies AND Alphabetthe parent company of the Internet search engine Google and the cloud infrastructure service platform Google Cloud.

Broadcom could run circles around Nvidia over the next five years

Based on historical data from Bank of America In Global Research dating back to 1980, companies that conduct future stock splits average a return of 25.4% in the 12 months following their announcement. That’s more than double the average annual return of 11.9% for the benchmark S&P 500 over the comparable period. Statistically speaking, Nvidia AND Broadcom appears poised for more upheaval.

But dig beneath the surface and you’ll find a number of clear reasons why Broadcom has the tools and intangibles to handily outperform Nvidia stock over the next five years.

If there’s one overriding theme that makes Broadcom a much better stock to own in the coming years, it’s history. Since the proliferation of the Internet three decades ago, no innovation, technology or other major trend has avoided an event that burst the bubble 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.

The entirety of Nvidia’s nearly $3 trillion increase in market value since the start of 2023 has come as a result of its AI-GPUs and the CUDA platform, which is a toolkit that helps developers build models linguistic majors. If the artificial intelligence bubble bursts at some point in the future, Nvidia’s stock is sure to take a bigger hit than any other AI company.

Although Broadcom has also enjoyed significant growth from AI, it is a much more diverse company that would be better off if history were to repeat itself. For example, Broadcom generates a significant percentage of its sales from wireless chips and accessories used in next-generation smartphones. It also manufactures optical components used in industrial equipment, networking solutions for newer automobiles, and cyber security solutions, to name a small number of other ventures and sales channels. While the bursting of the AI ​​bubble would be damning for Nvidia, it would not be the end for Broadcom.

AVGO dividend data according to YCharts.

Something else to consider is that Broadcom’s fast-growing dividend offers a more secure footing and, perhaps, a more mature investor base than Nvidia. Although Nvidia recently increased its quarterly payout by 150% to $0.01 per share on a post-split basis, the company’s token yield is only 0.03%.

In comparison, Broadcom’s quarterly payout has catapulted 7,400% higher since the end of 2010. While the company previously paid a basic annual payout of $0.28, Broadcom is now on track to give investors its a cumulative $21/share each year. That’s good enough for a 1.2% yield and shows how steady Broadcom’s growth in operating cash flow has been since the end of the Great Recession.

The final reason that Broadcom could easily surpass Nvidia in the return column over the next five years is their respective valuations. Nvidia’s trailing 12-month (TTM) price-to-sales (P/S) ratio recently crossed 40. This effectively matches the TTM P/S highs witnessed before the dot-com bubble burst from the likes of Amazon AND Cisco Systems.

Although Broadcom’s TTM P/S ratio of 19 is significantly higher than its average of 5 to 7 times sales over most of the last decade, it will have a much easier time growing at its current valuation than Nvidia .

Among Wall Street’s top two stocks divided by stocks, Broadcom appears to be a smarter long-term investment than Nvidia.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in 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.