Duuuude.....might want to change your #1 pick. BRoadCuM is a MO MO play and MO is leaving the building!!! Who warned you first???,,, months ago :-)!!! By the summer it will be renamed, BRoadCuMingDust.......ahahhahahah
thestreet.com
Is Broadcom's Core Business Finally Slowing?
By Herb Greenberg
Senior Columnist
Originally posted at 6:30 AM ET 1/18/01 on RealMoney.com
Remember Scient (SCNT:Nasdaq - news), and how nobody wanted to believe short-sellers when they warned that the fundamentals of its consulting biz couldn't support its lofty multiple? Happens all of the time, and it very well may be happening again, but this time not with a company riding some new wave, like Scient; this time the focus is on market favorite and industry leader Broadcom (BRCM:Nasdaq - news).
I know, I know, Broadcom, a maker of chipsets used in digital set-top cable boxes and networking equipment, has humiliated previous prophets of its doom. But this time really might be different, or so says one shrewd hedge fund manager (who, it so happens, is the same guy who warned here about Scient and several other memorable mishaps of recent years. He also happens to be short Broadcom).
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Not that you can expect to see Broadcom's problems surface, via its earnings, when it reports fourth-quarter earnings on Tuesday. Our short-selling source thinks the company will easily meet the Street's expected number of 31 cents per share, and even make the March quarter. But he argues that it's already reflected in the stock -- at least the stock of a company with centerpiece businesses that have either stopped growing and/or are under siege by competition.
Trading at 127 times expected earnings for 2000, and 89 times 2001 earnings (or more than twice the expected growth rate), Broadcom "is priced for perfection and a dominant and uncompromised competitive position," the short-seller says. The key word there is "uncompromised," starting with the digital set-top boxes, which are believed to account for around 35% of Broadcom's revs.
Morgan Stanley is predicting that the digital set-top market can be expected to grow this year at around 20%, but that's down from 110% in 2000; next year, Morgan Stanley is predicting box sales to fall about 15%.
What's more, competition is heating up in the digital box biz, as manufacturers look for additional suppliers. Motorola (MOT:NYSE - news) is developing chipsets for its own boxes, and Texas Instruments (TXN:NYSE - news) is rumored to be getting into the business. Right now, Broadcom has almost 100% of the market. "You can't go to a 101% share," the short-seller says.
The story is much the same on the networking side, where Marvell Technology (MRVL:Nasdaq - news) has been winning Broadcom customers (with a much lower-priced product) for about six months. Design wins take around six to 12 months to translate into production, the short says, which means Broadcom should start feeling that pain fairly soon.
Finally (and perhaps most importantly to the short-seller), there's the issue of acquisitions: Broadcom has been using its high-priced stock to make a string of deals -- around $6 billion worth since July 2000. The acquisitions, the short says, are a sign that Broadcom's organic growth, from its core markets, is slowing.
To which Broadcom CFO Bill Ruehle says: "If you're suggesting that our basic markets are slowing down and therefore Broadcom is slowing down, that could've been predicted two years ago, 18 months ago and a year ago. It could've been predicted ... that therefore we would be falling off a cliff. But instead of falling off a cliff, we've been doubling our revenues every year. What that proposition has missed is how we define our markets, and we define them as changing and growing."
Perhaps, but on Wednesday, Thomas Weisel Partners picked up coverage of set-top boxmaker Scientific-Atlanta (SFA:NYSE - news) with a market perform. The firm cited expected "linear rates" of growth "due to the natural limits of digital-cable market penetration." Won't that slowdown affect suppliers like Broadcom?
"Only if the supplier is standing still," says Ruehle, who gets high marks for taking my call during a time when most companies would bow out, by crying quiet period. He adds that the international market is in its infancy, and there's still plenty of room for growth in the U.S. as broadband applications expand.
Meanwhile, doesn't the rise in acquisitions suggest the company's core biz is slowing? "That's a negative way of looking at it," Ruehle says. He says the acquisitions are generally either enhancements to existing products or entries into new industries. Last year, for example, Broadcom bought NewPort Communications, which develops optical chips. Through NewPort, he says, Broadcom fully expects to take design wins from the likes of Applied Micro Circuits (AMCC:Nasdaq - news) "that won't show in the P&L for a couple of quarters, but will dramatically by the end of the year and into next year."
To which the short-seller says: "Proof its core business is slowing."
Two sides. Two compelling arguments. May the best man win. |
