3 Reasons Broadcom Corporation’s Stock Could Rise

Here's why shares of this chipmaker could be set to continue rising.

Aug 20, 2014 at 8:30AM

Shares of Broadcom (NASDAQ:BRCM) have performed exceptionally well following the company's divestiture of it its money-losing cellular chip business. While the company could have realized significant upside had it succeeded in this business, the harsh reality is that the market proved too brutal and the incumbents too powerful.

While Broadcom isn't going to find itself in the mobile chip spotlight that competitors Qualcomm and MediaTek enjoy, the remaining business is a cash-generating machine. Here are three reasons that -- even after a 28% rise year to date -- Broadcom's stock could continue upward.

Would you look at those infrastructure and networking profits?

One of Broadcom's more attractive businesses is its infrastructure and networking division. This operating segment, unfortunately, rarely gets much press because it's all "behind the scenes," so to speak. According to Broadcom's latest form 10-K, this business develops chips that power the backbone of the Internet (for example, Ethernet switches and wireless base stations).

As a result of the continued secular explosion of Internet traffic, Broadcom's infrastructure and networking business has grown rapidly. Last quarter, this operating segment saw sales jump 24.5% on a year-over-year basis, with operating profit up 67.5%

Naturally, this level of growth probably won't last forever. However, division General Manager Rajiv Ramaswami suggested in a presentation at the Cowen Technology, Media, & Telecom Conference that the business is set to grow revenue by double-digits over at least the next few years.

If Broadcom can sustain low double-digit growth in infrastructure and networking, along with operating margin between 35% and 40% (it did just shy of 40% in the most recent quarter), then this is a very attractive longer-term opportunity.

Cellular divestiture significantly improves Broadcom's profitability

Heavy investments in the cellular space have masked, if not completely wiped out, the profitability of Broadcom's connectivity chop business. In fact, Broadcom has noted that the total annual savings from exiting the cellular market would be about $600 million.

One of the main concerns among investors seems to be that exiting cellular would threaten Broadcom's connectivity business. It's true; without a complete cellular platform with which to attack the low end, Broadcom is likely to lose much of its lower-end connectivity business. Broadcom's management estimates that this "at risk" business is worth anywhere from $500 million to $800 million annually. 

The good news is that even if the worst-case materializes and Broadcom loses the full $800 million in low-end connectivity revenue, that revenue, at between 15% and 20% operating margin, is worth between $120 million and $160 million in operating profit. By cutting cellular loose, Broadcom potentially loses $160 million over time, but saves approximately $600 million in research and development spending (along with an additional $100 million in stock-based compensation).

Broadband is breaking out

Broadcom's final operating segment, broadband communications, also began showing significant strength in the company's most recent quarter. The division did $625 million in sales in the period, growing approximately 10% from the year-ago period and representing the highest revenue the segment has delivered on a quarterly basis in over two years.

More important, Broadcom guided this division to be "up slightly" in the current quarter. This is roughly in line with the trend seen in 2012 and an improvement from the third quarter of 2013, which was flat relative to the second quarter.

On top of the encouraging revenue growth, this operating segment also has a compelling (though not quite infrastructure and networking-level) operating margin, which came in at 28% in the most recent quarter.

Foolish takeaway

Even without a cellular-chip play, Broadcom's infrastructure and networking and broadband communications businesses are still incredibly robust cash-generating machines. Furthermore, Broadcom's most-visible business -- connectivity -- is set to see improved profitability as the operating expenses associated with the cellular business vanish.

Finally, the stock looks cheap, with sell-side consensus (per Yahoo! Finance) sitting at non-GAAP earnings per share of $3.26 (implying the stock is trading at under 12 times next year's earnings). Continued execution along this current trajectory could be enough to justify a far higher share price.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers