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. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!