Neutral on Broadcom Corporation

We recently reiterated our NEUTRAL recommendation on Broadcom Corporation (BRCM).

Broadcom’s product leadership and solid financial performance and strong cash flow generation continue to be the positives for the stock. Broadcom is well placed in the fast-growing wired and wireless communications markets, with cutting-edge solutions for a growing number of connected users who are demanding more content and bandwidth.

The market for wireless connectivity devices is expected to grow driven by increasing demand for smartphones, tablets, netbooks and digital TVs. Wireless LAN and GPS business continues to gain traction.

Broadcom is focused on the most innovative technologies related to connectivity, bandwidth and content. The continued expansion of pay-TV and Internet access services internationally, especially in China and India, provides significant opportunity for growth.

Broadband Communications business continues to grow propelled by the global adoption of high-definition pay TV services and increasing consumer preference for HD content leading to strong sales of core set-top boxes and broadband modems. Broadcom has a strong product portfolio and it continues to benefit from share gains in this segment as service providers increasingly deploy high-end devices.

In the Infrastructure and Network business, demand for video and data continues to outstrip expansion and Broadcom expects strong adoption of 10-gigabit products by data centers and enterprise customers to continue throughout 2010 driving strong revenue growth.

However, we remain concerned about the pressure on margins due to the accelerated new product (65 nm) ramps, which typically carry lower margins early in the product lifecycle and integration of new acquisitions (Teknovus and Dune). Operating expenses continue to grow due to increased R&D spend.

Additionally, market research firm iSuppli recently lowered its 2010 outlook for the semiconductor industry and expects global chips to grow around 32% compared with the previous estimate of 35%. This was primarily due to a slowdown in consumer demand for some electronic devices, including PCs. Inventories have been building throughout the semiconductor supply chain and this might lead to a decline in revenues in the second half of 2010.

In the long run, we maintain a Neutral recommendation. The stock carries a Zacks #4 Rank, which translates into a short-term rating of Sell. In the last six months, the stock has had a good run, carving a steady growth path, but we do not see much upside from current levels and would like to wait.

BROADCOM CORP-A (BRCM): Free Stock Analysis Report

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