Broadcom: Why The Glass Is Half Full

Aug.19.13 | About: Broadcom Limited (AVGO)

Broadcom (BRCM) has historically been a favored stock amongst analysts, offering both market diversification and growth. However, one merely needs to look at the stock chart to note that the current time is an exception. A combination of tepid earnings, chip acquisitions by Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF), and the summer tech doldrums have led to Broadcom's above average weakness when compared to the overall tech sector. Is Broadcom in trouble, or is this a buying opportunity? I outline four reasons below, for the bullish thesis on BRCM.

One dark spot in an otherwise bright picture. As the figures below indicate, Broadcom is doing quite well in 2 out of 3 markets (Broadband and Enterprise). For many companies that would be sufficient. The trouble is, the challenging market (Mobile & Wireless) is almost 50% of its revenue and a market in which analysts have anxieties both about Broadcom's competitive position and the market itself. My experience as a 15 year investor in Broadcom is that they sometimes stub their toe on product transitions (e.g. 3G to LTE) but have a long track record of covering the gap. I take the overall picture as a 'glass half full', one where the upside of Enterprise and Broadband will continue, and the mis-execution on Mobile will get fixed.

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The Analyst Exodus (is over). As the figure below shows, almost every analyst who can downgrade BRCM has done so. You could either panic from the spate of downgrades, or use analyst psychology to realize that an analyst exodus marks the low point, from which analyst re-entry provides upside. Analysts are measured by the positive return in their recommended stock from the time of recommendation to some fixed future date (e.g. 3 months of 12 months). It is to an analyst's advantage to 'take the loss' for now, and live to fight another ratings battle.

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Historically Low Price-to-Sales. BRCM might look expensive on a PE basis, but it is currently trading at a Price-to-Sales that is comparable to 2009. Note that low P/S also corresponds to stock price bottoms, and to my estimation is typically involved with product transitions. Broadcom is in a product transition (3G to LTE) as we speak. Unless you believe that Broadcom is broken as a company, the stock fundamentals suggest you're getting a good value if you buy in now.

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Longer-term upside. Google (NASDAQ:GOOG) Glass and the Apple iWatch presage a value shift from the core smartphone, to accessories and wearables. In that space, a company's competency in low-power chips and high performance network connectivity become important. Broadcom's #1 position in NFC, WiFi, Bluetooth suggest the potential of a duopoly between BRCM and ARM Holdings (NASDAQ:ARMH).

In summary, if you still believe in Broadcom's core-competencies of fast and timely execution, now is a good time to consider a position in the stock. While technology stocks can be weak in summer, Broadcom offers substantially more upside than downside. As always, do your own homework before making a commitment.

Disclosure: I am long BRCM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.