Better Split Stock Buy: Broadcom vs. Chipotle

Stock splits have become a popular market topic lately, with giants from various industries launching such operations. Why do investors love stock splits? Because they lower the share price per share, making it easier for a wider group of investors to get into a particular player.

In a split, the company issues additional shares to existing shareholders, which lowers the price without changing anything fundamental. The market value of the company and the value of your investment, if you are already a shareholder, remain the same.

A stock split is not a catalyst for stock performance, so investors won’t buy a particular player just because it started a split. However, companies that have started a split have generally done well in the past — and they have confidence that their shares can rise again from their new prices after a split. So it’s worth taking a second look at them and wondering whether they have what it takes to succeed in the long term.

Broadcom (NASDAQ: AVGO) AND Chipotle Mexican Grill (NYSE:CMG) recently completed splits, taking their stocks from the $1,000-a-share level. Both offer promising long-term prospects, but one is a better buy right now. Let’s take a closer look.

Broadcom Case

Broadcom is a giant in semiconductors and networking, producing thousands of products that you’ll find everywhere from your smartphone to your data center. To give you an idea of ​​how important this player is in communications, about 99% of all internet traffic goes through some Broadcom technology.

The company already has a solid track record of earnings, but it’s now poised to embark on a new wave of growth, thanks not only to its strengths in meeting the needs of those building artificial intelligence (AI) technology platforms, but also to its acquisition of cloud software company VMWare.

Broadcom said its AI revenue in the second quarter jumped 280% to $3.1 billion. And the acquisition of VMWare helped boost total revenue by 43% to more than $12 billion.

Broadcom should see more growth in the coming months as it continues to integrate VMWare. In fact, the company is forecasting full-year revenue growth of 42% over year-ago levels. When it comes to AI, Broadcom is also in the early stages of that opportunity. The company doubled its switch shipments this quarter — and Broadcom is working on the next-generation switches and optics that are essential for AI-accelerated clusters.

Broadcom shares are currently valued at 30 times forward earnings estimates, which is a reasonable level given the company’s potential in the rapidly growing artificial intelligence market.

The story continues

The Chipotle Case

Chipotle’s focus on fresh, healthy ingredients has kept customers coming back for years — even during the difficult early days of the pandemic. The fast-casual chain has steadily grown revenue and net income, and its stock performance has followed suit. Before the stock split, Chipotle shares hit more than $3,000, a level not typically seen for restaurant stocks.

The company is keeping 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 making it easier for customers to come back by expanding Chipotlanes, a drive-thru pickup system for people who order through the app or online. Of the 52 new locations that opened in the last quarter, 46 are Chipotlanes.

Chipotle grew revenue by more than 18% this quarter to $3 billion, and its operating margin rose to more than 19% from about 17%. The increase in total revenue was driven by something that is a priority at Chipotle: expansion. The company is looking to double its footprint to about 7,000 restaurants in North America. These new restaurant openings are driving Chipotle’s revenue growth quarter over quarter.

Now let’s look at valuation. Chipotle shares are trading at 48 times estimated earnings. While that’s down from levels of over 60 times earlier this year, some might still consider that a lot for a restaurant stock.

Broadcom or Chipotle?

So, should you choose the AI ​​giant or the popular fast-casual restaurant? Both companies could be good additions to a long-term portfolio, especially given the recent decline. But if I had to pick a better buy right now, I’d go with Broadcom.

Here’s why. First, Chipotle is growing, but most of that growth is coming from new restaurant openings, not growth at existing restaurants. Chipotle may have a hard time growing comparable-restaurant sales much more than it already has. With that in mind, the stock seems pretty expensive, even at today’s lower levels.

Broadcom, however, looks like a bargain because of its solid track record and presence in AI, a hot technology that is still in the early stages of its growth story. Demand from AI customers is strong today and likely to continue to gain traction, which could result in significant revenue growth for Broadcom and a win for investors who hold out for the long term.

Is it worth investing $1000 in Broadcom now?

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has a position 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.

Better Stock-Split Buy: Broadcom vs. Chipotle was originally published on The Motley Fool