Wedbush Morgan analyst Craig Berger last night sent a note to clients initiating coverage of Broadcom (BRCM) with a buy rating and a $45 target price. Excerpts:
Revenues are likely to reaccelerate on a year-over-year basis in June 2007. We forecast Broadcom’s revenues will begin reaccelerating on a year-over-year basis in the June 2007 quarter, a positive given that chip stocks have historically trended in concert with year-on-year revenue shipments. Broadcom has several high profile sockets that could help drive growth in 2007 including with Nintendo and possibly with Apple and Nokia. We believe Broadcom has several high profile sockets that could drive meaningful growth in 2007 including: 1) Selling Bluetooth chips into the Nintendo (OTCPK:NTDOY) Wii, 2) Possibly selling Bluetooth + FM Tuner chips into Nokia’s (NYSE:NOK) handsets ($150 million opportunity), and 3) possibly selling mobile multimedia chips into the mythical Apple (NASDAQ:AAPL) iPhone ($140 million opportunity). Ramping product cycles remain intact, likely to drive future growth for chips including: 1) Bluetooth into handsets and headsets, 2) 3G handsets, 3) Wi-Fi 802.11n, 4) gigabit Ethernet into switches, 5) digital TV, 6) voice functionality into cable modems, 7) mobile multimedia chips, perhaps into the mythical Apple iPhone, and 7) other applications like VoIP processors, GPS, and power management. Broadcom is also exposed to some more mature, slower growing markets. Broadcom does have about 60% exposure to some more mature, slower growing end markets, partially a result of its large share gains and revenue growth in recent years. We believe slower growing markets include chips for 1) the Ethernet market (client and infrastructure), 2) cable and satellite set top boxes, and 3) cable and DSL modems. These three major product areas, which comprise about 60% of total revenues, may continue to grow for Broadcom if the firm can still win meaningful share from competitors, or if the market research forecasts are too low. Broad IP portfolio drives significant barriers to entry. Broadcom has assembled a very broad suite of intellectual property in chip design, software, and reference platforms that drives significant barriers to entry. The firm leverages its broad suite of technology by integrating many different functional components onto a single chip, thus driving small solution footprints, low costs, high performance, and high functionality. Has the leading market share position in multiple end markets. Broadcom has the leading market share for chips into multiple end markets including cable modem, cable STB, satellite STB, GbE controller, PHY, Ethernet switches, Bluetooth, and Wi-Fi chips. Broadcom does not just want to compete, but rather dominate its chosen markets, and the firm pushes the integration and product diversity envelopes to achieve its objectives. Valuation is generally reasonable at 22x forward EPS estimate and 4.4x EV/S multiple. Shares of BRCM are trading at reasonable valuations, in our view. Our price target is based on a 30x multiple of our forward earnings estimate (2H’07 and 1H’08), in line with the firm’s four-year historical median forward P/E multiple. Our price target is also based on a 6.1x enterprise value-to-sales multiple (2007), also in line with the firm’s four year historical median multiple. Shares are currently trading at a 30% discount to these historical median multiples. Risks to attainment of our share price target include: options backdating related risks, litigation risks with QUALCOMM (NASDAQ:QCOM), customer concentration risks, a cyclical or end demand slowdown in the semiconductor industry or macroeconomic environment, market share losses in key markets, technological difficulty in moving its chips aggressively to 65nm, worse than expected chip pricing pressure, or weaker than expected margins.
BRCM 1-yr chart