One of the most frustrating experiences in life can be when, as an investor, you see your investment go under. The frustration multiples when the company that you’d invested in had good prospects, solid clients, and great innovation; but still, it fails to do well as an investment.
A similar thought would be running through the minds of Broadcom Corporation (NASDAQ:BRCM) investors, the semiconductor company which, according to me, is among the best bets to benefit from the proliferation of data going forward. However, the stock and the company haven’t moved in tandem and the market has probably underplayed the potential of Broadcom Corporation (NASDAQ:BRCM) so far.
So, when the company issued a downbeat guidance when it reported its recently released second-quarter results, it wasn’t surprising to see Broadcom Corporation (NASDAQ:BRCM) shares getting beaten up badly. The stock had held its own this year before the earnings report, even though the Street hadn’t been rewarding its estimate topping results over the past few quarters. But one misstep and the bears were out in full force, and the stock is presently languishing near its 52-week low.
I agree that Broadcom Corporation (NASDAQ:BRCM) missed on the top line by a whisker, and that its outlook wasn’t too great with the company guiding for revenue of $2.05 billion to $2.20 billion, below the estimate of $2.25 billion. However, what contributed to the massive fall in share price and the company’s woes since earnings were reported in late July were fears regarding its position in baseband chips. Slow sales of 3G baseband chips sent analysts on a downgrade spree and Broadcom Corporation (NASDAQ:BRCM) has been struggling ever since.
But, did analysts miss certain important points? While a downbeat guidance is certainly a concern, should one annihilate Broadcom Corporation (NASDAQ:BRCM)’s long-term credibility without going into the specifics? Certainly not! Management stated that weakness in 3G chips was a result of overstocking by its customers, along with some decline in demand.
Broadcom has one major customer for its 3G baseband chips according to management, and they accept that they don’t have many customers in this area now, but what analysts failed to highlight was the fact that Broadcom recently introduced a quad core chip which will begin shipping in the ongoing quarter.
Also, the company expects to find a place in more phones in the second half of the year. In addition, when you consider that Broadcom hasn’t stepped into the LTE baseband market yet, it doesn’t make much sense to chastise the company over witnessing weakness in 3G. Moreover, it looks like everyone forgot that Broadcom did deliver a 7% growth in its Mobile & Wireless segment, clocking $967 million.
Missing the point
Coming to the guidance, the fact that Broadcom derives a third of its revenue (according to Los Angeles Times) by supplying chips to Apple Inc.
(NASDAQ:AAPL) and Samsung might have played a part. The fact that Samsung hasn’t been able to sell as many units of the Galaxy S4 as it would have liked led the company to slash orders for components, and this might be one strong reason why Broadcom guided below expectations.
So, Samsung’s over-enthusiasm was also probably a reason why Broadcom had to suffer. As Reuters reports, analysts have slashed sales projections of the S4 by a staggering 30% in recent times, and the upcoming release of the next iPhone would probably dent sales further. But, you cannot force Broadcom to sell more chips to Samsung when the Korean giant doesn’t want it because it has produced too much already.
Going forward, Broadcom is looking at a sequential increase in mobile revenue, as against a decline of 3% (sequentially) in the previous quarter. While an iPhone refresh might hurt Samsung, it would benefit Broadcom since the company has been a long-time fixture in the iUniverse and it would look to maintain its position this time as well after being in the iPhone 5.
Why ignore the good?
The production of the next iPhone is well underway as we near launch date, while the clamor for a cheaper iPhone is also getting stronger by the day with various leaks indicating that such a product might exist after all. So, it’s clear that analysts are missing the point that if a cheaper iteration of the iPhone indeed exists, it might help Apple Inc. (NASDAQ:AAPL) spread its wings in the emerging markets and also augment Broadcom’s addressable market.