My Bullish Take on This Tech Stock
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Broadcom (NASDAQ: BRCM) announced its 2012 Q4 and full year results on Jan. 29. The company reported record annual revenue of $8 billion and cash flow from operations of $1.93 billion. It reported Q4 revenue of $2.08 billion, which surpassed analyst expectations of $2.07 billion.
Founded in 1991, Broadcom provides semiconductor solutions for wired and wireless communications. The company manufactures a variety of communication chips for devices like smartphones, network modems and set-top boxes.
Financials
Let us look at the growth figures for the company. The quarterly revenue experienced remarkable year-on-year growth of 14% but annual revenue growth remained at the same level. Annual EPS growth saw a fall of 24%. Quarterly EPS came down to 43 cents from 45 cents last year. Analysts expected an increase of 39 cents in quarterly EPS.
Broadcom's 2011 performance was excellent. It posted strong gains in market share and increased its design contracts significantly. The financial performance of the company was also solid. Growth slowed in 2012, however.
These figures show that though revenues are increasing, costs are increasing at a much faster rate, leading to a downfall in quarterly EPS growth:
Results Analysis
Broadcom projected Q1 revenue to be in between $1.824 billion and $1.976 billion, which was less than the analysts' expectations of $2 billion. These figures are even lower than the Q4 revenue figures. The company believes that global economic conditions and slowing demand are mainly responsible for this downturn. Revenues from the wireless segments are expected to be affected more seriously than from the wired segment.
Analysts are skeptical about the reason for the slowdown in sales. They believe that shifting market share between companies like Apple and Samsung can also be responsible. Apple's financial results have disappointed investors and added to the expected slowdown in the smartphone market. Broadcom sales of smartphone chips have come down by 9% in the fourth quarter.
Broadcom is also planning to increase its profits by expanding more into the growing sectors like near field communication (NFC) technology. It expects to double its NFC market share this year. This is a positive move and will strengthen the confidence of investors.
Industry Trends
Emerging markets like China and India are strong contenders for the growth of the semiconductor market. However, this growth affects profits as well, as these regions have poor purchasing power. High growth in industrial demand for semiconductors is expected this year, which is a further propelling factor for power management semiconductor solutions. Growing automotive markets around the world provide a positive outlook as they further support the use of semiconductors in safety, navigation and fuel efficiency electronic gadgets. The commercial aerospace market is also expecting increases in production.
Competition
Broadcom is in need of focusing on product innovation and engineering advancements to meet its competitors. It faces serious competition from established brand names like Texas Instruments (NASDAQ: TXN) and Qualcomm (NASDAQ: QCOM).
Texas Instruments is a strong competitor in the traditional segments. It has a strong presence in the Asia pacific region. It reported strong quarter four results. The company’s shares fell after hours as the company projected low growth for the coming quarter. Texas instruments is also expecting a slowdown due to reduced demand. It seems better to avoid this stock.
Qualcomm posted strong quarterly results in January. It reported quarterly revenue of $6 billion, showing year-on-year growth of 28%. Non GAAP earnings also experienced year-on-year growth of 30%. Quarterly free cash flow jumped by 24% as compared to the same quarter in 2012. The company is ready to spend a huge amount on research and development as it has accumulated cash of $28.4 billion with no debt. Qualcomm is projecting strong revenue growth for the coming quarters as well. Investors are feeling positive about investing in this company.
Conclusion
The short term investment perspectives are not so bright for this company. Broadcom has projected depressed revenue growth for the first quarter of 2013. This is mainly because of a slowdown in the smartphone market and changing market share between smartphone manufacturers.
However, in the long run, investment perspectives for Broadcom are very bright. Its diversified product portfolio gives it leverage on growth in data usage and connectivity and protects it against a slowdown in one particular segment. Strong industry linkages, like the ones with Apple, also make Broadcom stand apart from its competitors.
Broadcom’s diversified product portfolio, market credibility, future growth strategy and strong brand image make it a must buy.
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