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Broadcom: Valuation

Posted on Friday, Feb 29th 2008

By Vijay Nagarajan, Guest Author

The last month has been a great revelation for me. I have ventured beyond my comfort zone to research and understand the nuances of various other related segments like WLAN, Bluetooth, GPS, set-top boxes, broadband modems, DVD players, and Ethernet. Such is the depth of Broadcom’s business. Before I go into the details of this valuation, I wish to emphasize that I have learnt as much as you have through this process and have tried my best to present an objective, unbiased, well-researched and detailed work. I hope that this analysis provides a comprehensive data-point for your investment decisions.

I value Broadcom at $39.30 per share. Surprising, considering that the company’s share price is hovering under $20 these days. However, it should also be noted that this is only a few dollars off the company’s 52-week high of $43.07. This valuation is buttressed by the strength of the Mobile and Wireless business and complemented by the stability offered by the other businesses.

I would also like to put it in context. There is a reason why the shares are viewed unfavorably now. Apart from the lack of sizeable 3G design wins, it is the company’s expense management that has been causing worries in the market. The company spent over a quarter of its revenues in R&D, primarily associated with the conversion to 65 nm. Secondly, its protracted legal battle with Qualcomm has increased its SG&A expenses in recent times. These two factors have kept the operating margins low. The result is the depletion of its profits to a very small percentage of its revenues. It is illustrative (though unrealistic) to see what happens if Broadcom continues to incur high expenses. An additional operational overhead of 45% subtracted from its revenues yields a valuation of $22.24. Add to this a degree of uncertainty surrounding the mobile business and voila, you get closer to the current share prices.

The expenses last year have been a necessary evil to complement Broadcom’s aggressive mobile phone campaign. But the company’s management has taken pains to assure investors that its expense management is back on track. Additionally, they assert that once the mobile design wins start to yield revenues, the R&D expenses will be per the model of 20-22%. Broadcom also demonstrated slightly reduced Operating expenses in Q4 2007 as a pointer towards their internal measures to tighten the screws. In order for the company to successfully execute these promises, it needs more design wins and I am sure its Product marketing department is working round the clock to achieve this.

In summary, the $39.30 valuation is contingent on Broadcom’s mobile success and careful expense management. While this valuation relies substantially on the market condition and Broadcom’s proven product delivery track record, the reality depends on its continued ability to come up with competitive products and secure actual design wins. So, while my valuation is twice the current share price, I suggest waiting for another quarter or two before making an investment in the company. At the same time, my thought for those who currently own the company’s shares is to hold on to it. I don’t expect the share price to drop much below its current value. In either case, you will have more data this year to make your moves.

Disclaimer: These are my perspectives on Broadcom and does not necessarily reflect the views of Atheros Communications or Tensorcomm.

This segment is a part in the series : Broadcom

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[…] have reviewed a number of chip companies including deep-dives and valuation analysis on Broadcom, Qualcomm, Interdigital, and TI. We have not yet done Infineon, ST, or Marvell. We will, in due […]

Chips and Infineon - Sramana Mitra on Strategy Monday, March 31, 2008 at 10:14 AM PT

Don’t you think you should mention that you’re a product manager at Broadcom?

Kim Tuesday, August 5, 2008 at 9:56 AM PT

Kim, Vijay only started as a product manager at Broadcom yesterday. At the time of these columns, he had nothing to do with Broadcom, and in fact, while Broadcom found him through these writings, and recruited him heavily, they have pretty much forced him to stop writing. Ironical, don’t you think?

Sramana Mitra Tuesday, August 5, 2008 at 11:07 AM PT

[…] GPS chip in the iPhone, Broadcom (BRCM) is a top beneficiary of the 3G iPhone. Suggested reading: Vijay’s Valuation Series, stock analysis from Q407, Q108 and […]

Top 10 Semiconductor Stocks - Sramana Mitra on Strategy Wednesday, August 13, 2008 at 8:46 AM PT

deja vu. brcm is now 41 and the greatest DAY TRADING stock ever.

1. mostly beats and raises.
2. stock goes up 10%.
3. gets stuck in that 10% up oscillates 1 to 2 dollars above that range. great range to buy the dip's and short the rips (if you are fond of shorting)
4. again beats and raises.
5. go to point 2.

i think this stock can do 60 to 70 in next 1 year or so.

go brcm, go. i got an iphone 4g recently and hopefully added to your kitty.

meanwhile let's trade broadcom happily 🙂

kguy Sunday, November 14, 2010 at 9:53 AM PT