Billionaires Invest in AI Stocks Post-Split Ahead of 2025

Investors often appreciate stock splits for two main reasons: they lower the share price making stocks more affordable and often signify the presence of strong companies, as stock splits occur after notable increases in share prices. This phenomenon suggests that the original stock price was high enough for a split, indicating a potentially high-quality company.

In the third quarter, a number of hedge fund billionaires showed optimism by purchasing shares of Broadcom (AVGO) and Arista Networks (ANET), both of which recently enacted stock splits.

• Chase Coleman of Tiger Global Management purchased 1.6 million shares of Broadcom, boosting his stake by an impressive 912%. This move places Broadcom among his top 20 holdings.
• Stanley Druckenmiller of Duquesne Family Office bought 239,980 shares of Broadcom, marking the beginning of a new position in the stock. Broadcom now ranks within his top 15 holdings.
• Steven Cohen at Point72 Asset Management increased his stake in Arista by 32% with the acquisition of 211,823 shares. Arista now stands among his top 3 holdings, excluding options contracts.

Other billionaire investors also added shares of Broadcom and Arista in Q3, although their investments were smaller compared to the aforementioned figures. Ken Griffin from Citadel Advisors and Israel Englander of Millennium Management also invested in both companies.

Before investing, individuals must thoroughly understand the business behind the stocks. Here’s a closer look at Broadcom and Arista.

1. Broadcom

Broadcom focuses on semiconductors and infrastructure software. Its semiconductor products are essential in networking equipment like Ethernet switches and routers as well as in mobile devices and data centers. Broadcom also provides software solutions that deal with cybersecurity, mainframe observability, and data center virtualization.

The company holds a dominant position in the semiconductor market, particularly for networking equipment. It boasts an 80% market share, with projections showing that spending on Ethernet chips will grow annually by 20% to 30% in the coming years, according to JPMorgan Chase.

Broadcom leads in high-end application-specific integrated circuits (ASICs) designed for specialized tasks, such as artificial intelligence. With a 60% market share, the spending on AI accelerators, including both custom chips and graphics processing units (GPUs), is forecasted to rise by 29% each year until 2030, as reported by Grand View Research.

The company showed strong financial performance in its fiscal Q4 of 2024, with revenues rising 51% to $14 billion and non-GAAP earnings climbing by 28% to $1.42 per diluted share. However, it’s essential to note that organic revenue growth was only 11%, as the acquisition of virtualization company VMware added 40 percentage points to the revenue increase.

A key takeaway from CEO Hock Tan during the earnings call was that Broadcom is currently developing custom AI accelerators for three major players in the industry: Google’s parent Alphabet, Meta Platforms, and ByteDance which owns TikTok. Tan indicated that revenue from these partnerships could potentially multiply five times over the next three years.

Additionally, Broadcom is collaborating with two more emerging tech giants, now identified as Apple and OpenAI, who are expected to start contributing to revenue by 2027, suggesting substantial share gains for Broadcom.

Looking ahead, Wall Street anticipates Broadcom's adjusted earnings to grow at a rate of 22% per year until fiscal 2027, making its current valuation of 49 times adjusted earnings relatively reasonable. Hence, long-term investors may want to consider starting a position at this point.

2. Arista Networks

Arista Networks specializes in high-speed networking technologies. It provides Ethernet switching and routing platforms that facilitate data movement in enterprise and cloud data centers, combined with software services for network monitoring, automation, and security. Morgan Stanley has indicated that Arista stands in a prime position to capitalize on the rising demand for AI-driven networking solutions.

Arista has made its mark in two significant ways. The first is through its patently designed Extensible Operating System (EOS), which operates uniformly across its hardware. This streamlined system helps differentiate Arista from traditional vendors like Cisco Systems, which utilize multiple operating systems, complicating network management.

Secondly, Arista solely depends on third-party semiconductors, allowing it to create innovative networking solutions without a hefty investment in chip design. By partnering with companies like Broadcom, Arista can incorporate the latest technologies while maintaining focus on its software prowess.

In Q3, Arista reported robust results with a 20% revenue increase to $1.8 billion and a 31% rise in non-GAAP earnings to $0.60 per diluted share. The management team has also raised revenue guidance for the full year, expecting a 22% rise in Q4, along with projecting 16% growth for 2025.

Arista leads the market in high-speed Ethernet switching platforms, which include 100-gigabit switches and faster alternatives. As organizations continue to invest in AI infrastructure, the demand for Arista’s offerings is expected to surge.

Wall Street predicts the company’s adjusted earnings to grow at 16% each year through 2027. This consensus may make the current valuation of 52 times earnings seem high, yet given Arista's historical earnings growth exceeding estimates for 12 consecutive quarters, it presents an attractive buying opportunity for investors.

Billionaires, Stocks, AI