Wells Fargo’s chip analyst David Wong this morning raised his rating on shares of Broadcom (BRCM) to Outperform from Market Perform after listening to the company’s analyst day presentation in New York yesterday, during which the company offered an upbeat update to its current-quarter outlook, and made the case for its ability to make inroads in baseband sales and applications processors in mobile devices.
“Broadcom has, in our view one of the broadest and richest product lines in the semiconductor sector, spanning wireless and broadband communications, and communications infrastructure,” writes Wong. Wong raised his EPS estimate for this year to $1.59, to account for 41 cents this quarter, up from 36 cents previously estimated.
However, Wong’s note is one of the more back-handed upgrades I’ve seen.
He goes into some detail as to the risks he sees for Broadcom. Chief among them is the prospect that Broadcom’s position in WiFi and other “connectivity” chips may be hurt by incursions from Qualcomm (QCOM) and other competitors who have strength in baseband and application processors:
It appears to us that Broadcom has focused less on applications processor technology than many of its competitors. In our view, Broadcom�s weakness in baseband and applications processor technology creates risk to Broadcom�s high market share in connectivity chips.
Wong actually lowered his targeted “valuation range,” from a prior $34-$40 to $32-$38, given overall semiconductor uncertainty. However, he assigns Broadcom shares a high multiple, in the range of 23 times to 28 times forward GAAP EPS, given that “When Broadcom’s sales recover earnings may rebound rapidly to close to the $2 EPS reported in 2010.”
With respect to the competitive questions, I’d note that I and my colleague Shara Tibken had a good conversation this morning with Broadcom’s chief executive, Scott McGregor. Asked about the competition with Qualcomm, McGregor says that Broadcom is already competitive with Qualcomm in baseband processors when it comes to 3G devices, and that his company will “close the gap” with Qualcomm in the next couple of years as Broadcom moves into 4G/LTE processors. Asked about process technology, such as the move to 28-nanometer parts, where both Qualcomm and Broadcom are headed with foundry partner Taiwan Semiconductor (TSM), McGregor insists Broadcom’s grasp of the technology, and implementation, will be every bit as good as Qualcomm’s, if not better.
Broadcom shares today are up 47 cents, or 1.7%, at $28.92.
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