Savvy investors like stock splits for two reasons: They make stocks more accessible by reducing the share price, and they can be roundabout indicators of high-quality companies. That’s because forward stock splits are only necessary after significant share price appreciation, which rarely happens to sub-par companies.
Not surprisingly, a few hedge fund billionaires in the third quarter bought shares of Broadcom (AVGO -2.55%) and Arista Networks (ANET -1.40%). Both companies recently split their stocks.
- Chase Coleman of Tiger Global Management bought 1.6 million shares of Broadcom, increasing his stake 912%. Broadcom now ranks among his top 20 holdings.
- Stanley Druckenmiller of Duquesne Family Office bought 239,980 shares of Broadcom, starting a new position. Broadcom ranks among his top 15 holdings.
- Steven Cohen at Point72 Asset Management bought 211,823 shares of Arista, increasing his stake 32%. Arista now ranks among his top 3 holdings excluding options contracts.
Other billionaire fund managers also purchased shares of Broadcom and Arista in Q3, but the relative sizing of their positions is much smaller. For instance, Ken Griffin of Citadel Advisors bought both stocks, as did Israel Englander of Millennium Management.
Importantly, investors should never buy a stock without understanding the business. Read on to learn more about Broadcom and Arista.
1. Broadcom
Broadcom specializes in semiconductors and infrastructure software. Its semiconductors are used in Ethernet switches and routers (networking equipment), data center storage systems, and mobile devices. Meanwhile, its software addresses cybersecurity, mainframe observability, and data center virtualization.
Broadcom has a particularly strong presence in certain semiconductor markets. Its chips are the industry standard in networking equipment. The company has 80% market share, and spending on Ethernet chips is projected to increase at 20% to 30% annually in the next few years, according to JPMorgan Chase.
Broadcom is also the leader in high-end, application-specific integrated circuits (ASICs), custom chips purpose-built for specialized use cases like artificial intelligence (AI). Broadcom has 60% market share, and spending on AI accelerators (both custom and graphics processing units (GPUs) is expected to grow at 29% annually through 2030, according to Grand View Research.
Broadcom reported reasonably good financial results in fiscal Q4 of 2024, which ended in November. Revenue increased 51% to $14 billion and non-GAAP earnings increased 28% to $1.42 per diluted share. But organic revenue increased just 11%, as the acquisition of virtualization specialist VMware added 40 percentage points to top-line growth.
However, insight from CEO Hock Tan on the earnings call sent the stock soaring. Broadcom currently designs custom AI accelerators for three hyperscale companies, reportedly Google parent Alphabet, Meta Platforms, and TikTok parent ByteDance. Tan told analysts that revenue from those companies will increase at least fivefold in the next three years.
He also said Broadcom is working with two new hyperscalers, reportedly Apple and OpenAI, that will likely be revenue-generating customers by 2027. That means revenue from custom AI chips could increase much more than fivefold during the next three years, which itself implies substantial market-share gains for Broadcom.
Looking ahead, Wall Street expects Broadcom’s adjusted earnings to increase at 22% annually through fiscal 2027. That makes the current valuation of 49 times adjusted earnings look tolerable. Patient investors should consider buying a small position today.
2. Arista Networks
Arista specializes in high-speed networking. The company sells Ethernet switching and routing platforms that move information through enterprise and cloud data centers, and it augments its hardware with adjacent software for network monitoring, automation, and security. Morgan Stanley sees Arista as the company best positioned to benefit from demand for AI networking.
Arista has disrupted the market in two ways. Its core innovation is the Extensible Operating System (EOS), software that runs across its entire hardware portfolio. That single-system approach distinguishes Arista from legacy vendors like Cisco Systems that use multiple operating systems, which makes networking monitoring more complicated.
Additionally, Arista relies exclusively on third-party semiconductors. By sourcing chips from companies like Broadcom, Arista can design networking equipment with the latest technologies without investing heavily in semiconductor design. That strategy lets the company focus on its core competency, software development, and it affords customers flexibility in selecting which chips are used in their networking gear.
Arista reported solid results in Q3. Revenue increased 20% to $1.8 billion, and non-GAAP earnings increased 31% to $0.60 per diluted share. Management also raised full-year guidance such that revenue is now expected to increase 22% in Q4. Beyond that, the company anticipates 16% revenue growth in 2025.
Importantly, Arista is the market leader in high-speed Ethernet switching platforms, which include 100-gigabit switches and faster. Demand for high-speed networking hardware should trend higher as companies invest in AI infrastructure, and Arista is ideally positioned to benefit from that trend.
Wall Street expects the company’s adjusted earnings to grow at 16% annually through 2027. That consensus makes the current valuation of 52 times earnings look expensive, but investors should still consider buying a small position today. Arista’s earnings have grown more quickly than consensus estimates in 12 consecutive quarters.
JPMorgan Chase is an advertising partner of Motley Fool Money. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, 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. Trevor Jennewine has positions in Arista Networks. The Motley Fool has positions in and recommends Alphabet, Apple, Arista Networks, Cisco Systems, JPMorgan Chase, and Meta Platforms. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.