Broadcom Corp. (BRCM) is supposed to be a technology and semiconductor winner in the migration to tablets and smartphones and as mobile communication rises. Unfortunately, its shareholders are finding out that this path to victory is not assured and can come with hefty losses along the way. While stocks are very close to all-time highs on the DJIA and S&P 500, shares of Broadcom are far closer to 52-week lows than to the 52-week highs. This chip player is down and out and severely out of favor, but at some point the value investor crowd is going to have to pay attention here, based on its current share price and valuations. We took a look at this against Qualcomm Inc. (QCOM) for a basic valuation comparison.
The latest culprit to the mayhem was the late-July earnings release. Revenue was $2.09 billion in the second quarter, up 4.2% sequentially from the first quarter and up 6% from a year earlier. Unfortunately its earnings were a net loss on that pesky GAAP accounting measure due to acquisition charges. Investors and traders were not keen on guidance despite a forecast of growth ahead, sending shares down to $27 from $31.83. Shares have not rallied since and are down around $26.30 against a 52-week range of $23.25 to $37.85.
What is so problematic is that the smartphone, tablets and mobile communications markets are very fluid. The demand trends can fluctuate wildly from quarter to quarter, and some makers are thriving while others are floundering. It is an environment that creates a scenario of "really big hits and really bad misses."
Broadcom's stock chart is truly ugly. A technician will say that there is nothing to like at all here. The stock not only violated its one-year low lately, the last drop took shares to under a two-year low. Almost every analyst has downgraded the stock since earnings. We have seen downgrades in the past two or three weeks from the likes of UBS, BMO, Citigroup, Mizuho, RBC, Pacific Crest and other boutiques.
Value investors usually will admit that they are in the business of kissing frogs to find princes. Some even say that they troll the lists of 52-week lows frequently looking for new set-ups to start screening. They rarely if ever decide in an instant to pile in all at once, a strategy we also agree with.
Despite all the analyst downgrades, the consensus analyst price target from Thomson Reuters of $34.57 implies upside of about 30%. The $26.30 recent close also compares to a 52-week range of $23.25 to $37.85. A contrarian would tell you that a whole lot of bad news has been priced in here, so any good news at all would be very well received. Broadcom's short interest has been high all summer as well.
With a $26.56 price and a market cap of $15.4 billion, Broadcom trades at only about 9.7 times normalized 2013 earnings expectations and only about 1.8 times expected 2013 revenue. Those ratios for 2014 expectations are only 9.4 times earnings and 1.7 times revenue.
Qualcomm Inc. (QCOM) remains in favor here. It trades at about 15 times expected 2013 earnings and almost 13.5 times expected 2014 earnings. Qualcomm also trades at about 4.6 times expected 2013 revenue and about 4.2 times expected 2014 revenue.
What needs to be known is that Qualcomm is now about 10 times the size of Broadcom in market cap, with a $115 billion value. Its stock is also close to its 52-week high. Broadcom's dividend yield is currently about 1.7%, while Qualcomm's dividend is 2.1%, since it just recently raised its payout yet again.
Again, value investors almost never pile into any company all at once. There is a saying among momentum investors that stocks that hit 52-week lows tend to keep putting in more 52-week lows. That being said, a lot of bad news already appears to be factored in going forward.