Tickers in this Article: BRCM, TXN, INTC, QCOM, NVDA, CSCO
Calling bottoms and turnarounds is a tricky business, but it does not seem so outlandish to still be positive on Broadcom (Nasdaq:BRCM) at these levels. Certainly there are competitive risks, but what semiconductor company exists in a competition-free environment? Likewise, there is also the risk that this lull in the cycle lasts longer than the companies themselves expect, but the long-term valuation here looks compelling even if near-term results are not superb. TUTORIAL: How To Use Short Selling

Signs of Life in Q2
Broadcom's first quarter results were not very good and still the best that can be said about the second quarter is that it was meaningfully "less bad" as opposed to really better. Revenue decli ned again, but this time the sequential drop was just 1% (and revenue was up 12% from last year). The best performer in the group was the mobile and wireless, even though weakness in other segments results. Broadband and communication was down 4%. Profitability is still a concern, however. Gross margin did pick up about 70 basis points from the first quarter, but dropped 120 basis points from last year. Likewise, operating income was not strong on an annual comparison, dropping over 26% (and weak sequentially as well). Broadcom isn't stinting on R&D during this downturn, but the big jump in SG&A is a reason for pause.

Markets Good, Bad, and Ugly
Nokia continues to be a source of disappointment to Broadcom, Texas Instruments (NYSE:TXN), and pretty much anyone who supplies them. Perhaps Nokia can regain some momentum in 3G phones, but even I cannot write that with a totally straight face. Elsewhere, weakness in set-top boxes is not really surprising given commentary from Cisco (Nasdaq:CSCO) and Motorola Solutions (NYSE:MSI), but this market as a whole doesn't look quite so doomed.

Apple (Nasdaq:AAPL), Samsung, and smartphone/tablet opportunities for Broadcom combo chips continue to look like a good place to be for the next few years. Of course, even here there are risks - too much reliance on Apple would arguably put the company in a bad situation regarding future pricing demands. Elsewhere, Broadcom's broad exposure to switches (serving Cisco, Juniper (Nasdaq:JNPR) and Alcatel-Lucent (NYSE:ALU)) should reduce customer-specific risk in what is still a market with growth potential.

Too Much Competition and Popularity?
Where Broadcom is arguably most vulnerable is in those combo chips. Qualcomm (Nasdaq:QCOM), Intel (Nasdaq:INTC), Texas Instruments (NYSE:TXN) and Nvidia (Nasdaq:NVDA) all want that business, and none of these names leap out as easy marks.

Oddly enough and despite that risk of competition, Broadcom's biggest risk right now may be its popularity. There are quite a few buy/strong buy calls on this name. On one hand, that means plenty of people flogging this stock to institutions every week, but it also means that a lot of institutions have already heard the message and chosen differently.

The Bottom Line
Broadcom maintained good returns on capital even through this downturn and the company has shown that it has the R&D capabilities to target and penetrate attractive growth markets. Yes, competition is a risk, but that is why a stock like Broadcom carries an above-average discount rate. With fairly modest forward revenue growth and free cash flow margin assumptions, the stock still looks attractively undervalued. There are plenty of interesting beaten-down ideas in the chip and chip equipment space, but Broadcom is definitely worth more than just a passing glance. (For additional stock analysis, see ConocoPhillips Is A Strong Buy.)

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