One of the most frustrating experiences in life can be when, as an investor, you see your investment go under. The frustration multiplies when the company that you'd invested in had good prospects, solid clients, and great innovation; but still, it fails to do well as an investment.
A similar thought could be running through the minds of Broadcom (BRCM) investors, the semiconductor company which, according to me, is among the best bets to benefit from the proliferation of data going forward.
So, when the company issued a downbeat guidance when it reported its recently released third-quarter results, it wasn't surprising to see Broadcom shares getting beaten up badly. The stock had held its own earlier this year, even though the Street hadn't been rewarding its estimate topping results over the past few quarters. But one misstep and the bears were out in full force, and the stock is presently languishing near its 52-week low.
I agree that Broadcom's outlook wasn't too great with the company guiding for revenue of $1.975 billion at the mid-point, below the estimate of $2.13 billion. While a downbeat guidance is certainly a concern, should one annihilate Broadcom's long-term credibility without going into the specifics? Certainly not!
Broadcom management claimed that the weakness in mobile in the previous quarter was because a major smartphone customer, which is most probably Apple (NASDAQ:AAPL), used the 802.11n Wi-Fi chip. Broadcom has been focusing on 5G Wi-Fi technology but Apple decided to go with the old standard, leading to the same content in the iPhone as last time. The latest iPads also stuck to the same Wi-Fi standard.
But Broadcom believes that its customers remain firmly committed to move to 5G Wi-Fi going forward and help Broadcom's growth. In addition, Broadcom management claims that its 802.11ac solution (5G Wi-Fi) is twice as fast when compared to rivals.
Missing the point
Coming to the guidance, the fact that Broadcom derives a third of its revenue by supplying chips to Apple and Samsung (OTC:SSNLF) has played a part. The fact that Samsung hasn't been able to sell as many units of the Galaxy S4 as it would have liked led the company to slash orders for components, leading to lower sales. Along with Apple sticking to the old Wi-Fi standard, a drop in orders from Samsung also led to a weak guidance.
Why ignore the good?
It's not all doom and gloom for Broadcom. Broadcom's potential with its cutting-edge NFC chips and 5G Wi-Fi chips, which grew 50% on a sequential basis in the previous quarter, should not be ignored. In addition, the company is focused on diversifying its mobile customer base further. It was recently selected by ZTE to supply small cell baseband processors for its residential access points.
It is small things like these that we shouldn't miss, as the world is becoming a more connected place by the day and Broadcom's products should be in great demand since its chips enable connectivity. Too much has probably been made of the company's weak performance in 3G baseband, but not much emphasis has been laid on 4G efforts.
Don't be blinded
Broadcom is a pretty small player in baseband processors, occupying just 5% according to Strategy Analytics. But Broadcom is looking to make its presence stronger in this market and that's why it acquired Renesas Electronics last quarter. Weakness at Samsung and lower dollar content at Apple might be the reasons why Broadcom issued a soft outlook. Simply said, it's a short-term problem, as smartphones are still going to grow at an annual rate of almost 19% till 2016, according to IDC, and Broadcom's products have a lot of room for growth still.
Connected homes, Internet of Things, and even connected cars could be some of the drivers that we are ignoring right now. And the thing which irked me the most when analysts were analyzing Broadcom's quarter was that the Broadband Communications and the Infrastructure & Networking businesses, which together accounted for more than $1 billion in revenue weren't discussed at length, while its relatively small miss in wireless garnered so much attention.
These other two businesses have been performing very strongly, and I will focus on them in my next post. However, for now, one thing is pretty much clear -- Broadcom's mobile weakness seems overblown and the company should recover once the short-term headwinds clear off.
Check back in this space for more reasons why Broadcom is still a good stock to hold and why investors should consider scooping up more shares at these depressed levels with the stock trading at a forward P/E of just around 11 times. The company pays a dividend that yields 1.70% and has a payout ratio of 49%, which means that it can increase its dividend further.
And as I said, the mobile and wireless business is just one part of Broadcom's business, accounting for 47% of revenue. The prospects in its other two businesses are also quite enticing and I will cover them in greater detail in my next post, and then it will be more clear why Broadcom is a buy at its current levels.
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.