This maker of communications chips was a growth juggernaut in the past decade, as sales rose from $2.7 billion in 2006 to $6.8 billion in 2010. Since then, growth has sputtered, as sales rose less than 10% in 2011 and 2012, and are likely to grow less than 5% this year and the first half of 2014.
What went wrong? Broadcom has failed to keep up with rivals such as Qualcomm (Nasdaq: QCOM) in the area of wireless chips, which set the stage for especially weak near-term sales guidance. As a result, this stock now trades near multi-year lows.
Yet investors are being too myopic, focusing on likely weak results over the next few quarters, and should instead be focusing on the next few years.
One of the key drivers for Broadcom will be a growing rollout of advanced telecom networks, known as LTE (Long-Term Evolution). Broadcom recently acquired the wireless division of Renesas, which won't enable it to overtake Qualcomm in the wireless baseband segment but should help it act as a second source provider with the wireless service providers that typically split contracts for key components among two vendors.
Right now, investors are assuming that Broadcom will show little traction with this effort. Assuming a worst-case scenario, analysts at Morgan Stanley have put aside the wireless business and believe the rest of the business is worth $31 a share, roughly 20% above the current price. And what if Broadcom gains traction in LTE? If the company secures "LTE wins in (the second half of 2014) with major customers, and maintains dominant share of connectivity," then shares will trade up to $42, according to these analysts.
Outside of wireless, Broadcom's industry presence remains impressive. The company is a leading provider of chips that go into broadband networks and other parts of the telecom infrastructure. And it's a very profitable business: Annual free cash flow is likely to keep exceeding $1.5 billion despite the near-term challenges.
Still, the real upside for this stock will only come with LTE traction. "While we believe BRCM is very well-positioned in many of its markets, particularly in attractive margin areas such as infrastructure networking and broadband, the firm's fate in mobile and wireless is still up in the air," said Cody Acree, director of research at Williams Capital. That said, "We do believe this could be an attractive entry point for long-term investors, as the announcement of 4G (LTE) wins over the next few months could be a driver of share appreciation." Their $35 price target is 30% above current levels.
The key takeaway: Shares hold solid support at current levels and would possess solid upside if Broadcom can reinvigorate the wireless business.