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Why Net Investors Are Betting on This Broadband Builder The vast potential of Broadcom's chip markets keeps it a favorite -- despite a recent dip. So is this the time to buy in? Remember last spring, when E-commerce companies were the stars of the Internet sector? Now that former highfliers such as Amazon.com (AMZN) and eBay (EBAY) have fallen from their pedestals, companies that are building out the infrastructure of the Internet -- ones with real products, actual profits, and a proven business model -- have gotten top billing from Internet investors. Broadcom (BRCM), which makes specialized chips that allow for high-speed communications, is one such hardware company for which Net investors now carry a torch. "It's a pure high-bandwidth, last-mile company," says Merrill Lynch analyst Joseph A. Osha, referring to the anticipated surge in demand for superfast communications for homes and businesses. Broadcom's stock has risen 266% in the past year, with much of that gain coming since April, when many Internet leaders started to falter. Gregory Spear, president of Spear Capital Management in West Hartford, Conn., calls it an "up and comer" and notes it has the key characteristics of a top stock: "a leadership position in a growing industry and visionary management."
While some investors have doubtlessly been taking profits, Osha says he has been fielding calls from clients who missed Broadcom's runup, asking if now is the time to buy. Skirting the timing question, he simply points out that he has reiterated his buy rating. When to get back in is "the million-dollar question," says Lipton, who says he sticks to company fundamentals. But BancBoston Robertson Stephens analyst Arun Veerappan believes the dip, which has affected other makers of communications chips, is a buying opportunity. "I think we'll have a slow August and, after August, build from there," he says. Broadcom is the dominant player in three main markets, says Kurt Lanzavecchia, an analyst at C.E. Unterberg Towbin. Its chips go into digital set-top boxes, turning them into two-way services. It also makes chips for local-area networking equipment, speeding communications across corporate data networks. And it makes chips that go into the vast majority of cable modems, which connect homes to the Internet at high speeds. Now only a small part of its business, cable modems are nonetheless the fastest growing part, expected to reach 23% of sales by 2000, up from 9% in 1998, according to Hambrecht & Quist estimates. NEW CHIP FUNCTIONS. Henry Nicholas III, Broadcom's president and CEO, is quick to point out that Broadcom is also in markets for providing broadband over telephone wires and wireless services, including satellite networks. "All broadband is good for Broadcom," he says. Wall Street has focused less on Broadcom's newer markets, such as chips for HDTV and sending voice over the Internet, he says, but those are "huge potential markets" for the company. Not only are Broadcom's underlying markets growing but it also has several other growth strategies in place. The company is adding new functions to its chips so it gets more revenue for each system it serves. Meantime, it has created a replacement market as it has developed chips to increase data transmission speeds over corporate Ethernets from 10 megabits per second to 100 megabits and now a gigabit. It is also adding new products and acquiring new companies. In the second quarter, it completed acquisitions of Maverick Networks, which has technology to integrate voice and video into corporate networks, and Epigram, a leader in home networking. Competition is one of the biggest threats to Broadcom, since more chipmakers are entering the fast-growing communications space, say analysts. But they believe Broadcom should be able to maintain the lead it has in its technology. "The competitive landscape looks very favorable right now," says Lanzavecchia.
Spear believes that Broadcom's potential market over the next five years is too huge for the stock's value to be measured in earnings or sales ratios. "When the marketplace can grow that much, you just want to find whatever stock is in the leading position and pour as much money as you can into it." In that context, he says, price pullbacks like Broadcom's are "pennies from heaven." That sounds awfully optimistic when so many technology stocks are getting clobbered. If the market continues to punish high p-e stocks, Broadcom will doubtlessly fall further. This may not be the day to jump in, but Broadcom is clearly worth keeping an eye on. Amey Stone is an associate editor at Business Week Online. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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 Amey Stone covers the markets and investing for Business Week Online WEB POINTERS To visit some of the sites mentioned in the story, click here: Broadcom Epigram Hambrecht & Quist | ||||||||||||
