If you're looking for growth in the semiconductors industry, which provider of semiconductors for wired and wireless communications should you invest in? Should you invest in Broadcom to reap solid benefits in the future? Or do you think you should bet on other peers in this industry? In this article, I aim to deliver a clearer picture on where Broadcom currently stands. Our argument makes a largely statistical case for suggesting whether this stock is a smart bet for your profits.
Connecting Everything is a registered trademark of Fortune 500 company Broadcom Corporation (BRCM). It is a good description of what the company does as Broadcom semiconductor chips and embedded software provide connectivity solutions for the office, home, and mobile environments. The company website boasts Broadcom's product portfolio makes it the industry leader, and some experts seem to agree, at least in the evolving market for home networking technologies. In January of 2013 technology market research firm ABI Research ranked Broadcom as the top provider of home networking for innovation and implementation in a competitive analysis of the top five chipmakers. Rivals Qualcomm Atheros and MStar Semiconductor placed second and third.
Broadcom's reputation for innovation excellence was not enough to save the stock price from a serious beating after its Q2 earnings release on July 24th 2013. Less than stellar results from the company's wireless chip segment coupled with lower guidance sent investors to the exits, dropping the share price about 15% to settle at its lowest level since October of 2007
The stock was ripe for a panicky sell-off as analysts have been noting for weeks that the number of first time buyers of smartphones from the two companies that are near exclusive buyers of Broadcom chips - Apple (AAPL) and Samsung (GM:SSNLF)-is softening. In addition, rumors abound that both Apple and Samsung are considering manufacturing their own chips or even worse, switching to Qualcom products. Following the earnings release, Broadcom saw a hefty seven analyst downgrades of the stock.
Non-GAAP (Generally Accepted Accounting Principles) net revenue and earnings per share were positive, with revenue up 6% year over year and earnings per share at $0.70, above analyst estimates. Due to acquisition and other charges related to the NetLogic deal, GAAP earnings showed a loss of $0.43 per share.
Broadcom is still the industry leader in mobile wireless but is a marginal player in the baseband and application processor market with 3.9% market share. The company gets upward of 45% of its revenue from mobile wireless so it is hardly surprising investors get nervous when Broadcom reports weak results here and analysts are pointing to potential loss of market share to its competitors. When you add in the low guidance you have a recipe for disaster, despite the positive results reported for Broadcom's other business segments. Broadband, television, and networking equipment saw a 12% increase in Q2 2013 versus Q1 2013.
Broadcom vs. Key Competition
With a market cap approaching $111 billion, Qualcom (QCOM) is about seven times larger than Broadcom with its market cap of $15.84 billion. Broadcom's direct competition is with Qualcom Atheros, a subsidiary of Qualcom. The parent is actually classified in the communications equipment sub-classification of the technology sector, not the semiconductor sector.
Although Intel (INTC) has been a pre-eminent force in the semiconductor world for decades, the company focused its chip technological expertise on the PC segment, largely ignoring the mobile market until recently. They are in "catch-up" mode and could be a force to watch in the future.
While Broadcom's stock price is down close to 17% year over year, Intel and Qualcom are both up with a 14.10% rise for Qualcom shares and a 14.99% rise for Intel shares. As you know, stock price does not always reflect the fundamental value of a company. The following table compares some key performance metrics for the three companies:
Trailing Twelve Month P/E
Net Income Growth (3 Year Avg)
Return on Equity (TTM)
Data from Morningstar on July 30, 2013
Broadcom's outsized twelve month trailing P/E of 38.3 makes the stock look like a poor bet for value investors at first glance. However, look further and you can see the Forward P/E, Price to Book, and Price to Sales show Broadcom with better numbers than the two competitors.
Although Broadcom's low ROE is troubling, the number for FY 2012 was a more respectable 10.01%. The value that jumps off the table is the 3 year average net income growth of 122.5%; far superior to its competitors. Broadcom has benefited handsomely from the outsize success of both Apple and Samsung, both of whom use Broadcom chips almost exclusively. However, focusing on that number to make an investment division would be a classic example of rear view mirror investing. What is important is not only past performance, but future growth.
What Does the Future Hold?
Technological innovation today moves at a pace so rapid that much of what we consider high tech right now is already old tech. Consider smartphones and tablets as an example. Investors fret that Broadcom is in trouble due to potential loss of market share in these applications. Yet some experts already proclaim smartphones and tablets "rear view mirror" technology. Analysts at Citigroup released a research note recently in which they argue high end smartphones are already at 75-85% market penetration and could reach saturation as soon as 2014. The tablet market is maturing as well.
The "next big things" generating a lot of buzz are wearable computing devices and home networking. Google Glass is already being market tested and the Silicon Valley Business Journal recently reported Mercedes Benz is looking to incorporate the technology in its navigation systems.
Apple (AAPL) investors anxiously await any news about the coming of the iWatch but some skeptics question the market potential of wearables. However, no one is questioning the future of what is being called the Connected Home. It is already beginning with changes in media consumption via home televisions. Google recently introduced its Chromecast plug in unit that allows content streaming on a home television from multiple sources. It is already being referred to as a game-changer. A recent post in Forbes Online reports that a teardown analysis of multiple streaming devices performed by the website ifixit.com revealed both Broadcom and Qualcom Atheros to be key suppliers of chips and connective technologies.
Make or Break for Investors
Investors thinking of buying into the future of Broadcom need to keep their eyes on two trends. The first is wireless connectivity market share. Broadcom management in the recent conference call insisted the company's market share is stable. The second thing to watch for is any news about Broadcom contracts or other developments in Home Networking.
Evaluating technology stocks is a challenging proposition for the lay person who may not have the time or the inclination to learn the differences between broadband, baseband, bandwidth, and on and on. However, it is not an insurmountable task to stay abreast of technology innovations like those going into Connected Homes and Connected Cars. Broadcom has a deserved reputation for technological innovation and excellence. Given the potential market size of Connected Homes and Connected Cars, there should be opportunity for both Broadcom and Qualcom to prosper.