Wall Street is betting that Broadcom Corp. will ride out the downturn with minimal bumping and bruising.
The Irvine chipmaker has plenty of cash on hand, minimal debt and a solid footing in several key markets for chips, according to analysts.
The company “may actually emerge somewhat stronger as they take market share from possibly weaker players,” said Tim Luke, a Barclays Capital analyst in New York.
The optimism is playing out in Broadcom’s shares. They’re up about 15% this month on a recent market value of $8.5 billion, after dropping about 50% during the fall Wall Street meltdown.
The Philadelphia Stock Exchange’s Semiconductor Sector Index is up about 10% in December.
Broadcom itself is guarded.
A few weeks ago, the company lowered its sales outlook for the fourth quarter and said some of its customers have canceled orders.
Broadcom, which makes chips for consumer electronics, computers and networking gear, now is expecting fourth-quarter sales of $1.05 billion to $1.1 billion, down from its previous outlook of $1.17 billion to $1.2 billion.
The less-than-rosy forecast really didn’t faze analysts, who on average expect fourth-quarter profits of $194 million on sales of $1.19 billion.
“We think this preannouncement was widely expected among investors and is mostly embedded in the stock,” Craig Berger, an analyst with Friedman, Billings, Ramsey & Co. in New York, wrote in a research note.
Broadcom has a lot of things going for it these days, company watchers say.
For one, it’s got a nice mix of chips in consumer gadgets that still are in relatively high demand, including Blu-Ray DVD players, Apple Inc.’s iPhone and video game consoles such as Nintendo Co.’s Wii.
“They are very much in whatever it is consumers happen to have the ability to buy this holiday season,” said Cody Acree, an analyst at Stifel, Nicolaus & Co. in Dallas. “Broadcom still has chips in a huge swath of things you might find at Best Buy.”
Combo Chips
In addition, Broadcom’s long-running development of so-called “combo chips,” one of which combines Bluetooth, wireless networking and a radio tuner, could be a boon during tougher times.
“The firm’s broad technology portfolio allows it to create chips utilizing many (intellectual property) blocks that others do not have and thus cannot replicate,” analyst Berger said. “It would be very difficult for new competitors to enter Broadcom’s market and compete on the basis of features, performance or price.”
The company has an aggressive goal of putting out a new combo chip every two months next year, Robert Rango, general manager of Broadcom’s wireless connectivity group, said at a recent meeting with analysts.
It’s also looking to add more capabilities to the combo chip mix next year, including GPS, video processing and network connectivity.
Market Share
Broadcom could take market share during the downturn by buying up other companies while they’re relatively cheap. The company had $2.2 billion in cash and equivalents as of Sept. 30.
“Strategic opportunities to buy weaker competitors in the current environment are plentiful and the company could buy weaker competitors if financially attractive,” Ross Seymore, an analyst at Deutsche Bank Securities Inc. in San Francisco said in a note to clients.
Acquisitions
Broadcom might be able to beef up its business designing and selling wireless chips as some of its larger competitors back out.
Some have speculated that Broadcom could benefit from buying a division of Freescale Semiconductor Inc.’s wireless unit that makes baseband chips, the “brains” of a cell phone.
“There’s more of an opening for Broadcom maybe than there was a year ago,” analyst Acree said. “When you have all of these other competitors deciding to back away, it’s opening the door for Broadcom to participate in the standard baseband business.”
Acree said Broadcom is thought of as a potential suitor for Texas Instruments Inc.’s business making modem chips that are sold in stores for cell phones, which the company said it was looking to get into.
The unit would bring in around $350 million in revenue a year and “would come with a list of customers,” he said.
“That’s probably one property that fits with what Broadcom is trying to do,” Acree said. “The fact that TI has given the company a bit more breathing room has probably given investors a bit more encouragement.”
But Broadcom still faces the larger economic downturn, which is making its way to technology.
“The environment is difficult today,” Luke said. “Having announced a difficult fourth quarter, the first quarter could prove to be tough, too. They have to look at their cost structure and headcount very closely.”
