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.

Related Articles
  1. Stock Analysis

    How Toyota Succeeds at Home and Abroad (TM)

    Japan's biggest car manufacturer is also one of North America's biggest, delighting shareholders with its high profit margins.
  2. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  3. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  4. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  5. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  6. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  7. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  8. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  9. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  10. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center