Investors canvassing the chip sector for ideas today have to make a tough choice - go with quality names like Broadcom (Nasdaq:BRCM) and Qualcomm (Nasdaq:QCOM) and pay premiums that may limit capital gains, or go with cheaper names like Silicon Labs (Nasdaq:SLAB) that have more questions and yellow flags. Broadcom remains a quality play on the mobile explosion (and combo chips in general), and still looks like a reasonable candidate for investors looking to add tech to their portfolio.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.
Q1 Shows That Strength Is Always Relative
Investors who weren't aware of Wall Street expectations on Broadcom may well wonder why there seems to be a relatively positive buzz coming out of the chip company's quarter. After all, revenue was nearly flat both annually and sequentially, with not a lot of action (positive or negative) in broadband, wireless or networking.
Margins were a little soft as well. Gross margin dropped about a point sequentially and annually. While reported operating income plunged nearly 80% from last year's level, adjusted (non-GAAP) operating income shows a more moderate 4% annual and 6% sequential decline that is more in tune with the revenue and gross margin trends.
SEE: Understanding The Income Statement
Will the Noise Ever Stop?
One of the intrinsic parts of the Broadcom story is the near-constant buzzing over which company is threatening Broadcom's slot in this or that phone/manufacturer, and how the respective phones are all selling.
To be sure, this isn't all just noise - Broadcom's slot in Apple's (Nasdaq:AAPL) iPhone is important, as are its slots in Samsung's Galaxy line. But I do believe the constant pressure on sell side analysts to have something new (and "impactful") to tell their salesforce leads to a lot of hyperventilation and overreaction.
SEE: The Impact of Sell-Side Research
So, yes, there is a risk that production schedules at Apple will muck with Broadcom's sequential revenue numbers. And yes, there are risks that Intel (Nasdaq:INTC) may gain on Broadcom in baseband and/or that Broadcom may not close the gap with Qualcomm. And yes, there are risks that Texas Instruments (Nasdaq:TXN) or Marvell (Nasdaq:MRVL) catch a tailwind in connectivity. But Broadcom is a company that has won quite a few more battles than it has lost, and I would think these concerns often represent buying opportunities.
The Bottom Line
At this point, I expect Broadcom to deliver solid single-digit compound free cash flow growth over the next decade. That's going to strike many bulls as much too low, but I think the history of the semiconductor sector backs up a more conservative angle; price pressure will be constant and the growth leaders of one generation seldom transition to the same position in the next generation.
SEE: DCF Analysis: Forecasting Free Cash Flow
Fortunately, even a conservative projection points to a fair value in the $40s and enough undervaluation to make these shares worthy of consideration for investors looking for some tech exposure.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.