engineers first dreamed up the concept of the iPad -- perhaps the
most important computer product in a decade -- they had to rethink
every aspect of its design.
To make a very thin, lightweight, powerful device would have been
hard to pull off if it were stuffed with a number of distinct
semiconductors handling tasks such as WiFi, Bluetooth and network
communications. Luckily for Apple,
already had a solution at hand. The chip maker managed to combine a
number of discrete functions on just one semiconductor -- known as
Broadcom's SOCs can now be found in a number of Apple products, and
if you would consider Broadcom as an investment idea, then you need
not be concerned that
Android system could take
from Apple: A range of Android phones also use Broadcom's SOCs.
You actually come across Broadcom's chips every day: Wireless base
stations that direct cell phone traffic rely on Broadcom's
data centers use Broadcom chips to direct traffic when you make
online purchases; and when you get home at night, that set-top box
sitting on your TV may also use Broadcom chips.
It's no coincidence. Management has been steadily expanding the
company's reach into new niches after it realized that
communications, video and computing were all converging into one
eco-sphere. So Broadcom has poured prodigious amounts of research
and development (R&D) --$1.8 billion in 2010 alone and $4.8
billion during the past three years -- and has, arguably, the
broadest lineup of chips among industry players, including
venerable names such as
Texas Instruments (NYSE:
When Broadcom finds a hole in its product lineup, it's not afraid
to spend liberally to bring in the expertise. For example, it paid
nearly $4 billion this past September to acquire
Netlogic Microsystems (Nasdaq:
, a maker of specialized high-capacity communications chips (the
deal should close this spring). Some say Broadcom overpaid, seeing
as how NetLogic has only $400 million in annual sales. But
Netlogic's reputation among wireless-service operators,
network-security specialists and major systems OEMs (original
equipment manufacturers) is stellar. As a result, Broadcom should
soon be able to penetrate its existing customer base more deeply
with Netlogic's cutting-edge chips. The long-term plan is to
integrate the two firms' technology on one platform, taking the
whole SOC concept to a whole new level.
OK, so why am I only now writing about this great company now?
Because short-sighted investors, focused on an expected subpar
December quarter, have been dumping the stock.
But this is the kind of company investors should be seeking out in
environment. Great track records, bright
and myopic selling are a great recipe when looking for an entry
point. The key is to wait until
have found a bottom with downside support in place, and with
catalysts for fresh upside in coming quarters. And you even want to
see the beginnings of a rebound (Shares hit a
on Monday, Dec. 19, closing at $27.74 and then received fresh
support on Tuesday, Dec. 20, rallying 4%) .
Where's the downside support? Well, shares now support a
free cash flow
in excess of 10%, based on 2011 projections. It's rare to find such
a high number for a tech stock. Robust ongoing free cash flow
explains why Merrill Lynch says Broadcom's cash balance could rise
from a current $2.5 billion to $4.3 billion by the end of 2013.
What are the upside catalysts? Broadcom is on the cusp of a major
refresh cycle for a number of its chips in the first half of 2012.
As just one example, Wi-Fi networks are slated to move to a new
standard next summer known as 802.11ac. The protocol, which
supports high-speed transmission of high-definition video across
greater distances (three times faster than current Wi-Fi) should
lead many hardware makers to
new models -- many of which will carry Broadcom's chips. In fact,
Broadcom's 802.11ac chip will be the first to hit the market,
according to management.
Broadcom held its annual Analyst Day on Dec. 14 and laid out a
technology roadmap, which management says will lead to market share
gains in every niche in which the company operates. Few doubt such
a boast. As Needham's analysts point out, "Broadcom's strategy has
enabled the company to outgrow the broader semiconductor market in
15 of the past 16 years." Much of the company's future growth is
expected to come from the BRIC countries (Brazil, Russia, India and
China), which need to make ample investments to support such
systems as high-speed wireless video streaming.
Risks to Consider:
A tepid fourth-quarter outlook is the key reason behind the
stock's recent downward move, and first-quarter results may also be
restrained due to the lingering effects of flooding in Thailand,
which is the supplier of the about 40% of the world's hard-disk
parts, and an ongoing
in chip inventories. Broadcom is unlikely to benefit from the
projected upgrade cycle for many of its chips until the second
quarter of 2012.
Action to Take -->
The recent sell-off has turned Broadcom into a bargain at around 10
times projected 2011 profits. Back out the hefty $3.5 billion net
cash balance and this multiple drops below nine. Shares have
historically traded for between 10 and 20 times
, and a rebound just up to a multiple of 13 times projected 2012
profits (when cash is excluded) yields a $40
, which is more than 30% above current levels. By the time Broadcom
is in the sweet
of its product upgrade cycle four to six quarters from now, shares
could easily revisit that its
of $47 . At that price, investors would be looking at roughly 60%
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.