Broadcom Corp.
Ticker: (Nasdaq: BRCM)
Phone: (949) 450-8700
Website: www.broadcom.com
Price (7/26/2000): $238 7/16
How Did It Double?
Networking chip designer Broadcom (Nasdaq: BRCM) has been doubling in price, again and again, pretty much since the company went public in early 1998. Broadcom is developing the integrated circuits behind many of the high-speed broadband technologies available today. If you're accessing the Internet through a cable modem, a DSL connection, or a high-speed office network, or if you're enjoying video through a digital set-top box or via direct broadcast satellite, you may own a product that contains a Broadcom chip.
The company was founded by a UCLA engineering professor, Henry Samueli, and one of his students, Henry Nichols, in 1991. Broadcom has always been profitable, and it never accepted venture capital to get started, preferring instead to avoid ownership dilution and hand out more stock options to its employees. (Though the company has received "product development" help from companies like Intel, which invested $5 million in Broadcom in 1994.)
As the company's informative 10-K SEC filing notes, "Computer processor speeds have increased dramatically over the last decade and, as a result, have significantly improved the rate at which multimedia data can be processed. However, the rate at which such data can be transmitted has not kept pace. This disparity has become known as the 'bandwidth gap'..." Broadcom is working to close that gap.
The company has attracted some big customers as a result, including companies like Cisco (Nasdaq: CSCO), 3Com (Nasdaq: COMS), Motorola (NYSE: MOT), and Hewlett-Packard (NYSE: HP). Broadcom's shares have continued to rise for most of the past year as revenues and earnings skyrocketed higher. Last week, the company reported second-quarter earnings of $57.4 million, 186% higher than the year-earlier figure of $20.1 million. Revenues were up 105% to $245.2 million. A spate of recent acquisitions has also raised the company's profile.
Business Description
The company designs and develops -- but does not build -- semiconductor chips for a variety of high-speed networking products. Broadcom contracts out its manufacturing, which helps the company achieve high margins. Gross margin in the second quarter was an impressive 58.1%, though this number has declined in recent years. Profit margins have increased in the last year or so, however, reaching a healthy 22.8% in the second quarter.
Broadcom markets chips for six different product lines: digital cable set-top boxes, cable modems, high-speed Ethernet network cards, home networking products, digital satellite and broadcast receivers, and DSL equipment. Most of the company's products are based on the same core digital signal processing and integrated circuit technologies. By leveraging their technologies across different product lines, the company gets better bang for its R&D buck, which is good -- Broadcom spent 21% of its revenues on R&D last quarter.
Customers for these chips include companies like Pace Micro Technology, which is making set-top boxes for Time Warner's (NYSE: TWX) cable division, and Apple (Nasdaq: AAPL), which announced just last week that it is including Broadcom's Ethernet chips in all its new Power Mac G4 systems. Broadcom also announced this spring that it has shipped 250,000 of its DSL transceiver chips to local telecom companies.
Financial Facts
Income Statement
12-month sales: $735.7 million
12-month income: $161.8 million
12-month EPS: $0.93
Profit Margin: 22%
Market Cap: $60,539.3 million
Balance Sheet
Cash: $280.9 million
Current Assets: $570.3 million
Current Liabilities: $96.7 million
Long-term Debt: $0.97 million
Ratios
Price-to-earnings: 256.4
Price-to-sales: 82.3
How Could You Have Found This Double?
If you were a regular reader of the Rule Maker portfolio reports, you would have read all about Broadcom this past March, when Rule Maker co-manager Phil Weiss wrote about the company and his investment club's purchase of its shares.
In addition, the company received plenty of attention last year as it acquired many of its competitors. Investors researching broadband Internet services over cable or DSL lines would have likely come across Broadcom. Finally, Broadcom has regularly shown up on our Beat Estimates Screen since early last year.
Where to From Here?
While the potential markets for the company's products are large, some observers wonder if Broadcom has stretched itself too thin as it has attempted to broaden the applications of its core technologies. Broadcom has expanded beyond its original wireline markets to add wireless and satellite capabilities, and to that end the company has made ten acquisitions since January 1999.
One of those companies was privately held Bluetooth chipmaker Innovent Systems, Inc. As explained in the article linked above, Bluetooth is the protocol that enables short-range wireless data transmission between PCs, mobile phones, personal digital assistants, and potentially many other electronic devices. The future market for Innovent's Bluetooth-enabled transceivers could be huge.
Unfortunately, many investors have noticed Broadcom's top-notch performance and impressive prospects, so the stock is not exactly cheap nor are its products easy to understand. But investors willing to do some digging -- and carefully evaluate what they're willing to pay for the company's future earnings -- may be rewarded in the long term.
Related links:
Xircom, Broadcom Chomp at Bluetooth Bit, Fool News, 6/13/00
Is Broadcom a Rule Maker?, Rule Maker Portfolio, 3/28/00
See Also