Please ensure Javascript is enabled for purposes of website accessibility

Broadcom Stocks Up for the Holidays

By Anders Bylund – Updated Apr 6, 2017 at 11:31AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Broadcom's inventory management tells us something about the end of the year. Spoiler: It's good news.

Can you read smoke signals? Broadcom (Nasdaq: BRCM) is waving up some subtle ones about the upcoming holiday season, if you only know what to look for.

The second-quarter report showed a perfectly respectable effort. Sales shot up 54% year over year to $1.6 billion, including a 10% increase from the first quarter. GAAP earnings multiplied manifold to $0.52 per share from $0.03 per share. Broadcom provides many types of networking and video processing chips. The company benefits when networking giants like Cisco Systems (Nasdaq: CSCO) and Juniper Networks (NYSE: JNPR) are enjoying great business, which is the case right now. On top of that, you'll find Broadcom chips are a major component for most smartphone companies and many kinds of consumer electronics. Score, then score again.

But that's not the interesting part of this report. A quick look at the cash flow statement reveals some drastic changes to Broadcom's inventory balances as well as an unseasonably low increase in accounts payable. That should be enough to send you to the earnings call for further clues, and sure enough, there's a story there.

According to Broadcom CEO Scott McGregor, the company is holding an unusually large number of chips in warehouses right now, waiting to ship them out and charge for the products on demand. This practice, known as "hubbing," allows gadget manufacturers to manage their build-outs for hectic sales periods such as year-end holidays. It's starting kind of early this year, and Broadcom is doing more of it than usual.

Management talked itself warm about the sneak attack of this holiday rush and the "magnitude of new products and tape outs coming out of the company" in the third quarter. It's anyone's guess exactly what products we're talking about here, though: Broadcom supplies chips for a wide variety of consumer electronics and enterprise-class infrastructure equipment. Large customers range from Cisco and Alcatel-Lucent (NYSE: ALU) to Nintendo and Samsung, touching nearly every market in between those extremes. Broadcom might be lauded for recent high-profile wins with Apple (Nasdaq: AAPL), but its expertise and scope ranges across a vast breadth of products.

Broadcom is a fabless chip designer and depends completely on Taiwan Semiconductor Manufacturing (NYSE: TSM) and other third-party manufacturing houses to crank out those chips. A handful of large foundries are buckling under unprecedented order volumes from Broadcom and many others, and supply is lower than demand. Under these circumstances, I suppose it only makes sense to grab manufacturing capacity while you can get it and sock it away for a snowy day. But it's also an encouraging sign for retail shops in general and electronics companies in particular, because we're looking at the telltale signs of an optimistic food chain.

The Motley Fool is recommending 50 stocks in 50 days for its new "11 O'Clock Stock" series. For more information, click here. Then come back to Fool.com every single weekday at 11 a.m. ET for a brand new pick!

Fool contributor Anders Bylund doesn't hold a position in any of the companies discussed here. Apple and Nintendo are Motley Fool Stock Advisor selections. Try any of our Foolish newsletters today, free for 30 days.You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$150.43 (-1.51%) $-2.31
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$40.66 (-1.19%) $0.49
Juniper Networks, Inc. Stock Quote
Juniper Networks, Inc.
JNPR
$26.38 (0.19%) $0.05
Taiwan Semiconductor Manufacturing Company Limited Stock Quote
Taiwan Semiconductor Manufacturing Company Limited
TSM
$73.87 (-2.33%) $-1.76

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.