Stock splits have been a popular market theme in recent times, with giants across industries launching these operations. Why do investors love stock splits? Because they lower the per-share price of a stock, making it easier for a broader range of investors to get in on that particular player.
In a split, a company issues additional shares to current holders, a move that lowers the price without changing anything fundamental. The company’s market value and the value of your investment if you’re already a shareholder remain the same.
A stock split isn’t a catalyst for stock performance, so investors won’t buy a particular player just because it’s launched a split. But companies that launch splits generally have done well in the past — and have confidence that their shares can once again rise from their new, post-split prices. So, it’s worth giving them a second look and considering whether they have what it takes to succeed over the long haul.
Broadcom (AVGO -2.18%) and Chipotle Mexican Grill (CMG -1.67%) recently completed splits, bringing their stocks down from thousand-dollar per share levels. They both offer promising long-term outlooks, but one makes a better buy right now. Let’s take a closer look.
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The case for Broadcom
Broadcom is a giant in the area of semiconductors and networking, making thousands of products you’ll find anywhere from your smartphone to a data center. Just to give you an idea of how important this player is in the area of communication, about 99% of all internet traffic travels through some sort of Broadcom technology.
This company has already built a solid earnings track record, but it could be embarking on a new wave of growth right now. This is thanks to not only its strengths in serving the needs of those building artificial intelligence (AI) technology platforms but also its acquisition of cloud software company VMWare.
Broadcom said its second-quarter AI revenue soared 280% to $3.1 billion. And the VMWare acquisition helped total revenue climb 43% to more than $12 billion.
Broadcom should see more growth in the coming months as it continues to integrate VMWare. The company even predicts its full-year revenue will climb 42% from last year’s level. As for AI, Broadcom is in the early days of this opportunity, too. In the quarter, the company doubled the number of switches sold — and Broadcom is working on next-generation switches and optics essential to the needs of AI-accelerated clusters.
Today, Broadcom shares trade for 30 times forward earnings estimates, a reasonable level considering the company’s potential in the high-growth market of AI.
The case for Chipotle
Chipotle’s focus on fresh and healthy ingredients has appealed to diners over the years — even during the difficult early pandemic period. The fast-casual chain has steadily increased revenue and net income, and share performance has followed. Prior to the stock split, Chipotle shares had reached more than $3,000, a level generally not seen in a restaurant stock.
The company has kept customers excited about its food by bringing back favorites — like chicken al pastor — for a limited time and offering a rewards program for loyal fans. It’s also made it easy for customers to keep coming back by growing its Chipotlanes, a drive-thru pickup system for diners who’ve ordered through the app or online. Of the 52 new locations opened in the recent quarter, 46 include a Chipotlane.
In the quarter, Chipotle increased revenue by more than 18% to $3 billion, and operating margin expanded to more than 19% from about 17%. The gains in total revenue were driven by something that’s a priority at Chipotle, and that’s expansion. The company aims to double its footprint to about 7,000 restaurants in North America. These new restaurant openings have been driving Chipotle’s revenue increases quarter. after quarter
Now, let’s take a look at valuation. Chipotle stock trades for 48 times forward earnings estimates. Though this is down from levels of more than 60 times earlier this year, some might still find it hefty for a restaurant stock.
Broadcom or Chipotle?
So, should you choose the AI giant or the popular fast-casual restaurant? Both companies could make good additions to a long-term portfolio, especially given the recent dip. But if I had to choose the better buy right now, I’d go for Broadcom.
Here’s why. First, Chipotle is growing, but a lot of that growth is coming from new restaurant openings rather than growth within existing restaurants. It may be difficult for Chipotle to grow comparable restaurant sales much more than it’s already done. Considering this, the stock looks pretty expensive, even at today’s lower level.
Broadcom, however, looks like a bargain due to its solid track record and its presence in AI — a hot technology still in the early days of its growth story. Demand from AI customers today is strong, and it’s likely to continue gaining momentum, which could result in significant revenue gains for Broadcom and a win for investors who hold on for the long term.
Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Broadcom and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.