Shares of Irvine-based Broadcom Corp. have broken out of a six-month funk, outpacing a larger rebound among chipmakers.
The company’s shares are up roughly 30% since the start of the year and 70% higher than their recent low in November.
“The whole chip group has had a pretty big run lately,” buoyed by promising consumer demand, said Craig Berger, analyst at FBR Capital Markets & Co. in Arlington, Va.
Broadcom’s rally has outpaced some other chipmakers and the industry as a whole. The Philadelphia Semiconductor Index, which tracks 18 chip stocks including Broadcom, is up 15% since the start of the year and about 50% since the November trough.
Rivals Qualcomm Inc. and Texas Instruments Inc. have seen their shares rise, but not as much.
Qualcomm, which makes cell phone chips, is up 12% for the year and up 40% since November.
Texas Instruments is up 7% since January and 22% since November.
Investors have come back to Broadcom for a number of reasons.
For one, concerns about consumer demand have eased some.
“What we are seeing is demand, while weak in the first quarter, wasn’t as bad as feared,” Berger said. “Chip stocks have rallied pretty meaningfully off of that.”
Broadcom’s communications chips go into consumer electronics such as Nokia Corp.’s cell phones, Apple Inc.’s iPhone and Nintendo Co.’s Wii.
“We believe recent order strength is a result of increasing demand for electronics in China as a result of its stimulus package,” Berger said.
Another big factor: Inventories were handled better in this chip downturn than in past ones.
Companies that buy chips largely put the breaks on ordering at the end of last year. They opted to work down what chips they already had in their stockpiles.
The early action helped sidestep a chip glut, which would have worsened the downturn by lowering prices for chips.
“Chip inventories have gotten so low that customers are down to hand-to-mouth levels,” Berger said. “We’ve gotten over the worst of the worst and now we are seeing customers who need to replenish their inventories.”
Turnaround?
Some industry watchers even have gone so far as to say that leaner chip inventories could help spur a turnaround this year.
“Because inventories are being kept low, there is likely to be a whiplash effect when the economy starts to recover and orders improve,” Jim Feldhan, president of Scottsdale-based Semico Research Corp. said in a recent report in online trade publication eetimes.com. “It’s not going to be a good year, but I don’t think we are going to see as disastrous a year as we did in 2001 (after the tech bubble burst).”
Hard to Gauge
There’s one drawback: Leaner chip inventories overall make it harder to spot a true uptick in demand.
“The big questions is: ‘Are the underlying demand trends strong enough to sustain a rally, or is it just replenishment orders?'” Berger said.
Semico’s Feldhan said the industry “is likely to see a few false starts on demand improvement before it stays steady.”
Berger said he remains bullish on Broadcom.
He recently upped his price target on the stock to $24 per share, up from a previous estimate of $20 per share.
Broadcom was trading at around $23 per share last week on a recent market value of $11 billion.
He sees the company as one of the few chipmakers “best positioned to benefit from these difficult macro times.”
Berger said he expects chip production to grow 30% in the current quarter, up from a previous outlook of 2% growth.
That’s up from a dismal first quarter, when chip production fell 40% from the fourth quarter.
He expects Broadcom to report first-quarter sales closer to the high end of its revenue estimate of $800 million to $875 million.
Analysts, on average, are looking for $847 million in sales.
Berger said he’s looking for Broadcom to post profits of $10 million, more than the average of $3 million expected by Wall Street. The company didn’t give a profit outlook.
Broadcom is set to report results April 21. n
