Where’s all the love for Broadcom Corp.?
The communications chipmaker that could do no wrong a few months ago has taken a licking on Wall Street in the past week or so.
In the week after Broadcom announced its first-quarter earnings,which beat estimates,shares fell 10% to about $40 with a market value of nearly $22 billion last week.
The decline has wiped away about $2.5 billion in market value, more than the value of all but 11 Orange County-based public companies. The drop, which eased some last week, also erased big gains for Broadcom shares in the past few months.
Analysts cite concerns about the stock’s valuation, rising costs at chip plants Broadcom contracts with and fierce competition for some chips.
At the company’s annual meeting late last week, a shareholder asked Chief Executive Scott McGregor why the stock dipped after the solid quarter.
“We had a great first quarter,” McGregor told shareholders. “It’s quite amazing the stock is down.”
Investors should look at the long-term performance of the stock, which has doubled during the past year, he said.
“It’s a volatile stock,” McGregor said. “Don’t look at it day to day.”
After the meeting, Bill Ruehle, Broadcom’s chief financial officer, said employees raise concerns when the stock declines.
Ruehle said he tells workers: “Focus on delivering results and the stock will take care of itself.”
Outside the company, some investors are watching closely.
Bob Bacarella, portfolio manager of Wheaton, Ill.-based Monetta Fund, which owns Broadcom shares, said he still considers Broadcom a “hold.”
“It better hold here,” said Bacarella, who might bail out of the stock otherwise.
The stock price decline could just be a case of investors cashing out recent gains. Broadcom shares are up more than 30% this year, even after the recent pullback.
But the retreat could be part of a longer- term decline.
Some investors worry that Broadcom’s shares have gained so much during the past year that they’re out of whack with its profit and sales growth.
There’s also concern about stock options, which Broadcom has handed out to workers in big numbers.
Options inflate shares outstanding when they are exercised, lowering earnings per share.
Still, few doubt the strength of the company and its prospects for growth.
“I don’t know why (shares have fallen),” said Aalok Shah, an analyst with D.A. Davidson in Portland, Ore., who echoed Broadcom’s take on the decline. “It was a good quarter.”
Q1 Results
Broadcom posted adjusted net income that nearly tripled in the first quarter to $222 million, versus a year earlier.
Revenue was $901 million, up 64% from a year earlier.
Analysts were looking for income of about $210 million on sales of $870 million.
The company also raised its outlook for the current quarter, prompting several analysts to raise their earnings estimates.
“We expect to continue to outgrow the overall semiconductor industry as we have done in every year so far,” said McGregor, during a call with analysts and investors.
Earlier this year, Wall Street gushed when Broadcom raised its outlook. One analyst, quoting a line from “Wayne’s World,” said “We’re not worthy,” during a January call with company executives.
But analysts weren’t so rosy during the latest conference call.
One brokerage downgraded its rating on Broadcom. Caris & Co. of New York shifted its outlook on the chipmaker from “buy” to “average.”
Caris analyst Rick Whittington said in a research note that gross profit margins have “peaked” and are “liable to decline.”
Broadcom, which contracts out for production of its chips, may have to pay more to plant operators amid high demand for their services. Plant costs are on the rise, too.
Whittington wrote that while Broadcom’s “fundamentals remain robust,” there’s likely to be fewer positive earnings surprises from the company in the future.
Other analysts expressed some doubts as well.
Broadcom’s stock price already might reflect much of its growth prospects, said Allan Mishan, an analyst with CIBC World Markets Inc. in New York. He was writing when Broadcom shares were close to $48.
“The larger question is how much is priced in, and what is actually achievable,” Mishan said in a research note. “We think strong market growth will indeed continue, but market share gain expectations may need to come in among investors (at least qualitatively). We see a transition from offense to defense in 2007 as Broadcom’s competitive position across its major businesses moves toward incumbency.”
Dominates Markets
Mishan pointed out Broadcom is now No.1 or No. 2 in many of its key markets, including gigabit ethernet controllers, switching, cable set-top boxes, cable modems, wireless local area networks and Bluetooth.
Two areas where Broadcom stands to have big growth prospects are chips for cell phones and digital TVs, though the gains won’t come immediately.
Mishan raised his profit estimate for 2006 by about 8% after the first-quarter results. He upped his sales estimate by 5% to $3.88 billion.
Other analysts are more positive on Broadcom.
“We think Broadcom has the most powerful product cycle in semiconductors, with a leadership position in nearly every important growth market,” said Mark Lipacis, an analyst with Prudential Equity Group LLC in New York, in a report.
“You name the technology buzzword, Broadcom is there … We think that the company is still in the early stages of many of its product cycles, and we believe that it has the best chance to continue to post upside surprises,” he said.
Satya Chillara at American Technology Research Inc. in San Francisco maintained his rating of “buy” on the stock, saying digital TVs will be a “significant contributor” by the second half of the year. He took on the concerns of the bears in a note.
Chillara said Broadcom has the ability to steal market share from others and has a diversified product line.
Chillara said Broadcom still could become No. 3 or No. 4 in the market for cell phone chips behind San Diego-based Qualcomm Inc. and Dallas-based Texas Instruments Corp.
