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

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  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 >>

You May Also Like

Trading Center