Is Broadcom Corporation's Downgrade Legit or Not?

Does this analyst make a good case? Or is it just more noise from Wall Street?

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Apr 3, 2014 at 12:02PM
Technology and Telecom

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Broadcom Corporation (UNKNOWN:BRCM.DL) traded sluggishly on Thursday after Piper Jaffray downgraded the communications chip company from overweight to neutral.

So what: Along with the downgrade, analyst Ruben Roy planted a price target of $34 on the stock, representing about 9% worth of upside to yesterday's close. So while momentum traders might be attracted to Broadcom's steady share-price climb in recent months, Roy's call could reflect a growing sense on Wall Street that its valuation is becoming a bit stretched.

Now what: According to Piper, Broadcom's risk/reward trade-off is pretty balanced at this point. "While we believe that BRCM is well positioned across a number of growth markets including the data center and telecom service provider markets and in a stable, good margin broadband end market, we are concerned with the company's customer concentration within the mobile device end markets and the potential for market share losses over the next several years," said Roy. "As well, BRCM's efforts to build a larger presence in the mobile device market with a push into 4G baseband technology remain in early stages with little visibility into longer-term customer traction potential." When you couple that uncertainty with Broadcom's 40-plus P/E, it's tough to disagree with Piper's cautiousness.