Broadcom (Nasdaq: BRCM) is by turns intriguing and harrowing to watch. Right now, I want to applaud the company's long-term focus in the face of short-term pain. Shareholders probably feel the burn instead. It's all right; this, too, shall pass.
The share price plunged by more than 15% this morning after the semiconductor designer invested so much in its research and development department that it almost put the bottom line under water, despite surprisingly fat revenue. Three months of breathless gains were wiped out in one fell swoop, and the stock is back to where it was before Samsung released a phone using Broadcom's latest and greatest low-power communications chip.
This company sits in a pretty sweet spot in the semiconductor market, supplying chips to high-growth industries like wireless networking, cell phones and their base stations, and high-definition entertainment. These guys are competing with giants like Texas Instruments (NYSE: TXN), STMicroelectronics (NYSE: STM), and Intel (Nasdaq: INTC), as well as hungry midgets like Sigma Designs (Nasdaq: SIGM) and Atheros Communications (Nasdaq: ATHR) -- and Broadcom is holding its own admirably in market after market.
The way to do that in such a crowded space is by staying on the bleeding edge of technology, beating the competition to the punch with the technologies electronics makers are asking for. And that costs cash money. This quarter's R&D expenses added up to $352 million, 6.1% more than last quarter and 29% higher than the year-ago period. R&D is the bulk of Broadcom's operating expenses, and it represents 72% of gross income. Gutsy move, that.
And management says the R&D spending spree is far from over. According to CEO Scott McGregor, "In the fourth quarter and in 2008 we will continue to invest aggressively in research and development of products for the very large cellular handset market, as well as new product offerings to address more of our existing customers' needs."
Even at this level of reinvestment into the business, Broadcom is cash-flow positive and has a very strong balance sheet to help cover any rough patches in the terrain ahead. It's up to the company's ever-growing battalion of engineers to keep the gravy train rolling by coming up with the right innovations at the right times. And they seem to have an uncanny knack for that.
In other words, I think this is just a speed bump in the stock chart, albeit a jarring one. Hold on tight and ride it out.
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