During June and July, things got a bit overheated with Broadcom (NASDAQ:AVGO) shares. Prior to its July 15 ten-for-one stock split, Broadcom stock was trading at around $175 per share. Since the split, however, this much-followed AI infrastructure play has started to pull back.
Now at around $156 per share, although the stock is inching higher as of this writing, don’t assume just yet that the post-split pullback has screeched to a halt. Investors are finally concluding that the recent split does nothing to help or hurt AVGO’s fundamentals.
We warned against buying shares on the split news alone in our last Broadcom article, but chances are plenty of confused investors did just that in the trading days prior to July 15. From here, these fair-weather fans, in a state of panic because of near-term losses, could take their exit.
This, in turn, may place additional pressure on the stock. However, while not a pretty sight for existing investors, if you’ve been sitting on the sidelines, the time to pounce may be approaching.
Why a Broadcom Stock Rout May Persist
After Broadcom last reported quarterly results in June, speculators dived into AVGO. The reason for this went beyond just the company’s “beat and raise” results for the preceding fiscal quarter.
On earnings day, Broadcom not only topped analyst estimates and provided upward revisions to guidance. The company on that day also announced its plans for the now-completed stock split.
Again, some investors erroneously believe that stock splits have a positive impact on stock fundamentals.
Others knew full well that this wasn’t the case. However, in an act of trying to wager on market psychology, these traders nonetheless bought Broadcom stock, aiming to flip it during or right after the split was completed.
This explains why AVGO largely remained at elevated prices during this brief period that the stock split was still pending. It may signal that the post-split sell-off could continue for a period beyond just a few trading days.
Given how the stock market typically enters the doldrums during late summer, and the fact that this company isn’t expected to report earnings again until after Labor Day, selling from split speculators continues to outweigh. Hence, the possibility of an extended slide lower for shares.
A Silver Lining for Old and New Investors Alike
If you already own Broadcom stock, the prospect of further weakness may be the last thing you want to hear. If you don’t own AVGO yet, this may give you even more concern about doing so in the near-term. All of this is perfectly understandable. Still, keep in mind that there is a silver lining here.
If investors exit AVGO positions, for reasons that have nothing to do with fundamentals, it’s possible that the sell-off proves to be an overreaction in hindsight. Shares could fall back to the low-$140s.
Whether you are an old investor increasing a position, or a new investor starting to build one, buying in at these prices could prove advantageous.
Yes, there have been growing concerns that Big Tech’s AI infrastructure build out will soon slow down. However, that may not end up being the case. As J.P. Morgan’s Harlan Sur recently argued, Broadcom’s AI tailwind remains poised to continue for years to come.
With this, Sur gives the stock a $200 per share price target. The analyst may see AVGO hitting $200 per share within a year, but it’s possible that this split-adjusted price milestone is reached far sooner than that.
The Verdict: Get Ready to Pounce on AVGO
If the aforementioned scenario plays out, and Broadcom slides down to $150, then perhaps to $140 per share, in the weeks ahead of earnings, you may want to do more than just keep an eye on the situation.
With the split sell-off artificially weighing down on shares, and investors taking a “show me” view on the AI build-out tailwind, AVGO could be in for a big boost, if the company unveils positive surprises during its early September earnings release.
In the event this happens, expect a positive reaction from the market. Perhaps, one more strong than that experienced back in June, when the stock went to prices topping $185 per share.
Broadcom stock may not necessarily hit $200 per share two months out, but as it will likely be on track to hit such prices sooner rather than later on sentiment shift, you may want to grab or add to a position if weakness persists.
Broadcom stock earns a B rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.
