Broadcom's Hardships Continue

| About: Broadcom Limited (AVGO)

In the after-hours of Tuesday, Broadcom (BRCM) announced its quarterly earnings where it beat the estimates; however, the company's future guidance was not good enough to satisfy the investors, which led to a sell-off. As the company's market value fell 27% since the beginning of the year, Broadcom has to turn things around before investors start buying its shares again.

Broadcom earned 55 cents per share in the third quarter of this year, up from 38 cents in the third quarter of last year ($316 million vs $220 million). The year-to-year growth was 44% but it was mostly due to cost-cutting measures as the company's year-to-year quarterly revenue was flat at $2.15 billion. Excluding one-time items, the company earned 76 cents per share, beating the analyst estimates of 68 cents per share. The revenue was a little better than the estimations of analysts who were looking for $2.13 billion.

For the next quarter, Broadcom guided for revenues of $1.92 billion to $2.03 billion while the analysts were looking for $2.13 billion, which is above the high-end of the company's guidance. The company also announced that it would lay-off 1,150 employees which represent roughly 10% of its workforce.

In the recent years, Broadcom fell behind the current technology as it still lacks a chip compatible with the LTE technology. As smartphones get faster, better and more sophisticated, their chip needs also increase dramatically, and Broadcom hasn't been innovating fast enough to meet the demand. Broadcom's market share loss has been at a slow but steady rate, and the investors of the company want things changing quickly before it's too late, as the telecom industry moves and changes very rapidly and those who fail to innovate can be left behind. As half of Broadcom's revenues come from the wireless industry, investors are hoping for more than a single-digit growth in this area. In the western world, most phone makers are moving rapidly from 3G to 4G and Broadcom's heavy reliance to 3G makes it tough for the company to gain market share.

We are going through an interesting time when most chipmakers report weak results. Recently, Intel (NASDAQ:INTC), Advanced Micro Devices (NYSE:AMD) and Texas Instruments (NYSE:TXN) disappointed investors with weak results. The semiconductor industry is highly cynical and things aren't looking up for the entire industry in the short term. The PC market is shrinking and there is a lot of competition for the fast growing markets such as the smartphone and tablet markets.

Just last month, Broadcom acquired some assets from Renesas Electronics in order to facilitate its transition towards the LTE technology; however, about a third of the company's lay-offs will come from this acquisition. The investors will not look at this very kindly because this will make it seem like Broadcom doesn't know what to do with its recent acquisition (or worse yet, it is having second thoughts about the acquisition). In the conference call, the company acknowledged that it doesn't expect any 4G LTE related revenues until next year.

Broadcom also announced that its margins are likely to fall. In the last quarter, the company's gross margin was 53.6% which is expected to fall by 50 to 100 bps in the next quarter. Apparently, there is too much competition coupled with soft demand, which forces many chipmakers to reduce their asking prices for some of their products.

The company generated $672 million from its operations, spent $63 million on dividends and $378 million on share repurchases. At the end of the quarter, Broadcom's cash position fell from $2.3 billion to $2.1 billion. This amount provides some cushion for the company in the next couple years as it goes through restructuring.

It seems like Broadcom won't see much of a growth this year. The company has its own issues in addition to being in the middle of a downturn in a cyclical industry. In the next couple quarters, most chipmakers will be struggling to see growth. Starting 2014, Broadcom might see renewed growth if its 4G initiative turns out successful. In the last year or so, many investors lost faith with the company's current management and many analysts aren't sure about the current management's execution skills. The next couple quarters might be the last chance this management gets from the investors before they raise their voice.

Even though the analysts are likely to update their figures in the coming days and weeks, they currently expect Broadcom to earn $1.78 for the full year, $1.83 for 2014, $2.47 for 2015 and $2.73 for 2016. Given that the average P/E ratio in the semiconductor industry is around 13, the company could be worth as much as $36 by 2016 if it meets the analyst targets. This represents an upside of 44% between now and the end of 2016; however, many investors will be highly skeptical about the company's chances of meeting analyst estimates in the long run.

If you already have shares of Broadcom, it may be a good idea to hold onto a small number of shares and see what happens. If not, this may not be the best time to buy because the bearish sentiment is far from over for this company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.