Buy, Sell, or Hold: Broadcom

Broadcom (Nasdaq: BRCM  ) has been booming lately, up nearly 17% on the year while the Nasdaq has sagged 4%. The company can thank its winning streak on soaring demand for networking and mobile technologies. These are areas where the chip giant specializes in, so it's no surprise to see Broadcom ride the favorable trend to riches.

Looking forward though, is Broadcom still a strong candidate for your investment dollar? Here's a list of reasons to buy, sell, and hold the company.

Buy:

Positioned for growth: With Texas Instruments (NYSE: TXN  ) shifting away from baseband processors, Broadcom has been able to move into the market and score wins from major manufacturers Nokia (NYSE: NOK  ) and Samsung, among others. Not only that, but the company has proven extremely adept at creating systems on a chip (SoC's) that integrate several features such as Wi-Fi, Bluetooth, and GPS technology together. Apple (Nasdaq: AAPL  ) went with a Broadcom SoC on its new iPhone 4. As more and more technology spending is shifted to mobile devices, Broadcom's expertise at integrating several functions onto a single chip will lead to a strong flow of design wins. A look at the revenue portion of Broadcom's three main business units shows the shifting focus mobile and wireless technologies have on the company.

Aside from mobile, Broadcom also has key growth opportunities in other areas. Its Broadband Communications unit has scored several wins in growing areas of consumer spending like Blu-Ray players and LCD TVs. Also, with electronics increasingly integrating wireless functionalities, Broadcom stands to make further gains in home electronics.

Sell:

  • Questionable management practices: The company has faced recurring legal scandals across its existence. In 2006, Broadcom announced an options expense bombshell that resulted in the company restating earnings by $2.2 billion. The situation worsened in 2008 when co-founder and former CEO Henry Nicholas and the company's former CFO were indicted on stock-option backdating charges among other more bizarre charges that included drug distribution. The charges were eventually thrown out, but question marks over Broadcom's business practices remain. For one, the co-founders who have faced legal woes still control a majority of voting power in the company through a dual class structure. Also, Broadcom continues heavy use of stock option incentives in compensating its employees. If you deduct stock-based compensation from a free cash flow measure, the company trades at nearly 30 times trailing cash flow.

Hold:

  • Strong mobile competitors: The mobile growth areas that Broadcom is targeting also face competition from both Qualcomm (Nasdaq: QCOM  ) and Texas Instruments, two larger competitors with greater resources. However, Broadcom has a diversified product line where it leads in other areas. Although shrinking relative to the size of the rest of the company, the Enterprise Networking unit still managed 27% operating margins last year hawking devices such as Ethernet controllers for use in servers. In non-mobile products, Broadcom is often the largest company around.

If you're looking to invest in Broadcom, I'd have to tell investors to look elsewhere. Notably, I think chief competitor Marvell (Nasdaq: MRVL  ) offers a better value, especially after taking the stock-based compensation into effect. If you're looking to this sector, Marvell is for you.

Eric Bleeker owns shares of no companies listed above. Nokia is a Motley Fool Inside Value recommendation. Apple is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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