The Barron's 500
Our unique report card on how companies performed for investors
Top-ranked in this year's Barron's 500 is Broadcom, a California-based semiconductor maker at ground-zero of the exploding information economy. Unlike better-known companies such as Intel and Advanced Micro Devices, which are mainly in the business of making chips for PCs, roadcom is in the burgeoning business of designing and making chips for high-speed communications devices. That now means Internet devices -- far and away the fastest-growing sector of the business.
By outside estimates, Broadcom chips are now in more than 80% of all cable modems, digital cable TV set-top boxes and local area network switches sold around the world, making the company one of the key beneficiaries in the continuing seismic shift in communications technology. In the past year or two, the speed at which a device can receive and transmit information, be it video, data or even voice, has become far more important than the ability to process that information, which the cheapest PC can easily do today. And this trend is likely to continue into the foreseeable future.
Enabling far faster data transmission is where Broadcom reigns triumphant. Its chips let all these devices shoot data anywhere from 100 to 1,000 times faster than a standard 56-kilobit-per-second modem. And this holds true regardless of whether the data move over computer cables, cable networks, satellite links or even, most extraordinarily, old-fashioned copper telephone lines.
Playing in a diverse market that analysts figure was under $1 billion in 1998 but will approach $4 billion by 2002, Broadcom is riding the crest of a wave -- as its financial numbers confirm. After 1998 sales quintupled, 1999 sales more than doubled, to $518 million. Earnings per share jumped from 20 cents in 1998 to 45 cents last year -- and Street estimates look for a further 50% -- plus gain in the current year and at least a 30% advance in 2001. With all that going for it, Broadcom stock had a good runup to the tech-stock correction, rising from around 30 at the start of 1999 to a high of 253 last month. Then, like most of their peers, the shares took a dive, falling 38% to 152 1/2 last week. At that price, however, they are still heady at 200 times prospective earnings.
But as one of the relatively small number of Internet plays that is actually generating profits, Broadcom remains a favorite among technology funds, most of which don't dispute Chief Executive's Henry Nicholas's assertion that the stock's dip may present a classic buying opportunity. "We are just at the beginning of the full emergence of our markets," he argues, adding that consumers will demand in the not-distant future high-speed communications on everything from TVs and computers to cell phones and Palmlike personal assistants. "We are enabling the next generation of computing."
"The company has really established a dominant presence in its markets," concurs Clark Westmont, an analyst with Salomon Smith Barney. "The only major risk to continued growth is customer concentration, the fact that three customers each account for over 10% of sales. That leaves them vulnerable to events not of their own fault.
"Even so, the stock is very attractive at current levels," he adds. "With the business accelerating and looking at the growth markets they serve, I can see the stock $100 higher at over $250 within six to 12 months."
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