Broadcom (Nasdaq: BRCM) stands at a crossroads. The company is reforming its customer list and changing what it thinks of as competitive advantages, and this in the midst of its core markets absolutely exploding. Is that a good time to transform the entire company, or is Broadcom shooting itself in the foot?
Judging by the harsh market reaction to Broadcom's fourth-quarter report, you'd think the answer involved heavy bandages and a crutch. But that's not necessarily the correct conclusion at all.
Sales jumped 45% year over year to $1.95 billion. GAAP earnings more than quadrupled from $0.11 per share a year ago to $0.47 per share today. Rolling margins keep expanding, and Broadcom generated $1.28 of operating cash flow for every dollar of 2010 earnings.
That doesn't sound like a troubled operation to me.
And then there's the product-line transformation. Broadcom's traditional strength used to be broadband communications solutions, but mobile and wireless chips have become the company's largest segment. That was also the fastest-growing division in the fourth quarter, driven by highly integrated radio chips for Android and Nokia (NYSE: NOK) smartphones. Broadcom is competing with STMicroelectronics (NYSE: STM) to replace Texas Instruments (NYSE: TXN) in the Nokia account as the Texans are withdrawing from the baseband radio market.
Yeah, you can scoff at the Nokia opportunity if you want. Declining or not, the Finnish handset maker is a global leader in mobile phone sales of various stripes, and moving into that account is still a large incremental sales opportunity with particular strength in Europe (big whoop) and China (sign me up!). Nokia's handset division is a rapidly ramping account in Broadcom's order book.
It looks as if Broadcom's strategy is working. You might want to take advantage of this knee-jerk reaction to build a position in the stock, or at least slap an outperform call on Broadcom in CAPS. It's been helping my own all-star CAPS rating since last April.
