Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



When Will Broadcom’s Shares Recover?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Last July, shares of Broadcom (NASDAQ: BRCM  ) took a beating following a less-than-stellar earnings report. However, it wasn't just the worse-than-expected numbers that were the problem at the time, but concerns over Broadcom's connectivity business as well as progress in cellular platforms. Since then, the stock hasn't quite yet recovered to its $37-per-share highs, but it has recovered quite nicely from its lows.

What are investors looking for?
Broadcom's business is split up into three main operating segments: mobile & wireless, infrastructure, and broadband. The infrastructure and broadband businesses are extremely profitable in their own rights, and the connectivity portion of the mobile & wireless business is also quite profitable. Unfortunately, as Broadcom has invested more aggressively in complete cellular platforms, the operating profitability of the division has tanked, with operating margin just shy of 4% in the most recent quarter. 

Add to that fears that Broadcom's much larger competitor, Qualcomm (NASDAQ: QCOM  ) , is set to gain some pretty serious connectivity share, and you have a recipe for Wall Street essentially writing off the mobile & wireless business. If Broadcom can provide fairly compelling evidence that this business is going to return to strong profitability, then the stock could command a meaningfully higher multiple than it does today on the expectation of more robust earnings growth.

But wait -- Broadcom trades at a pretty high P/E!
According to Google Finance, shares of Broadcom trade at a whopping 43.67 times earnings. However, this represents GAAP earnings, which includes things like one-time non-cash charges and share-based compensation. Back in that painful July quarter, Broadcom took a $501 million non-cash impairment charge on the acquisition of NetLogic.

What exactly is an impairment charge? So, when a company purchases another company for a specific value (in this case, Broadcom paid $3.7 billion for NetLogic), the purchase price is often determined based on how much money the target company expects to earn over a given period of time.

If at some point after the acquisition it becomes clear that the company won't earn as much as thought, then obviously the asset is worth less than what was paid for it -- requiring the company to take a "loss" on the excess amount paid. Broadcom acquired NetLogic in 2011 and by Q2 2013 it was clear that Broadcom had overpaid, thus it took a writedown, which according to GAAP translates into a hit on net income.

Ex-NetLogic Broadcom isn't expensive
With 581 million shares outstanding, the $501 million charge translates into a hit of $0.86/share. Add this back to the current GAAP EPS number of $0.73 and all of a sudden this 43.67 P/E stock becomes a 20 P/E. If you exclude stock-based compensation as well, then the stock looks even cheaper, although some may argue that doing so paints an unfairly positive picture.

Is Broadcom still a good value here?
While Broadcom felt like a "no brainer" in the $26-27 range, the shares still do offer value just shy of $32. Of course there are competitive concerns from Qualcomm, Intel (NASDAQ: INTC  ) (which just rolled out its first 802.11ac low power connectivity combo), and others on the connectivity side of things, and yes the market needs to see a payoff from the heavy mobile R&D investment, but even ex-mobile the company has a good business.

So, the questions you need to ask yourself as an investor are the following:

  • Does Broadcom have a good shot at growing and delivering profit in mobile & wireless (or will it sell the division if it can't)?
  • Are there any catalysts that could drive the stock higher?

It really looks like things get better from here
The answer to the first question, in this Fool's view, is "yes." The answer to the second one -- and this may sound cliché -- is also "yes." Broadcom should benefit from the roll-out of the next generation iPhone/iPad products later this year, as Apple (NASDAQ: AAPL  ) is likely to use higher end/higher ASP connectivity combos in its next generation devices, particularly as the Android competition continues to heat up. 

And, of course, expect the roll-out of devices based on Broadcom's integrated apps processor/modem platform to help restore confidence in the company's cellular efforts. Given that Qualcomm owns this market, and given how tough of a time even Intel has had in providing a viable integrated part, success on Broadcom's part could translate into much-improved sentiment toward the mobile & wireless business.

Want more growth than Broadcom can provide? 
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 27, 2014, at 10:33 AM, MeirElazar wrote:

    For anyone who wishes to understand Ashraf Eassa’s motiviations and methodologies, I suggest you examine his article entitled “AMD Looks Finished” along with all of the reader comments. It was published on March 20th, 2014 in Seeking Alpha.

    I would particularly like to point out all of the comments relating to Ashra’s deletion of peoples comments. It indicates that Ashraf has comments of people opposing his view deleted, censored, and purged.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2890678, ~/Articles/ArticleHandler.aspx, 9/5/2015 1:44:48 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Ashraf Eassa

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter:

Today's Market

updated 4 hours ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 3:59 PM
AAPL $109.27 Down -1.10 -1.00%
Apple CAPS Rating: ****
BRCM $50.40 Down -0.79 -1.54%
Broadcom Corp CAPS Rating: ****
INTC $28.52 Down -0.56 -1.93%
Intel CAPS Rating: ****
MRVL $10.85 Down -0.27 -2.43%
Marvell Technology… CAPS Rating: ****
QCOM $54.29 Down -1.26 -2.27%
Qualcomm CAPS Rating: ****