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Apple Gains Pave Way for Atheros, Broadcom

Struggling chipmakers Atheros and Broadcom are poised to rebound when the economy recovers.

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

The success of




Research In Motion


will eventually trickle down to


that provide the


their devices use. The trick is to pick the suppliers best positioned to succeed when the economy turns.


Atheros Communications





are struggling now, but could rebound when the


ends. Buying opportunities could soon emerge if weak earnings drag down their share prices.

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While worldwide demand for traditional cell phones is expected to shrink 10% this year, sales of so-called "smart phones" is projected to grow 3.4%, according to market research firm IDC. Next year, smart-phone demand is forecast to rise 22%, three times faster than that of conventional phones.

iPhone and BlackBerry devices will likely lead the industry. These devices rely on wireless chips from Broadcom and global-positioning and Bluetooth technology from Atheros. Broadcom's shares have climbed 38% this year and Atheros's rose 19%, beating the 14% advance of S&P's semiconductor index.

The first quarter wasn't kind to either company. Broadcom and Atheros lost $97 million and $7.6 million, respectively. Revenue at both firms dropped by more than 17%.

However, short-term earnings misses and sales weakness shouldn't deter investors. There are plenty of reasons to believe these stocks will shine when the recession ends and spending picks up. Just look at the companies that Broadcom and Atheros supply.

Apple reported second-quarter earnings that beat analysts' estimates. Sales of iPhones doubled from a year ago. Research in Motion added 3.9 million new BlackBerry accounts during the quarter than ended in February.

Broadcom chips are used in everything from iPods to Nintendo Wiis. The company has also developed technology designed to facilitate wireless networks in cities. Demand for Broadcom products will likely rise as more people connect to the Internet wirelessly.

Atheros is best known for its 802.11 chipsets, which are used in wireless routers. The company also makes GPS and Bluetooth chips for phones, allowing users to connect headsets to them and find directions and maps.

Both companies have zero long-term debt. This will enable them to weather the recession without the added drag of debt payments.

Most tech companies rely on loans to fund research and development efforts that will lead to new products. Atheros and Broadcom have been able to buck the trend and draw from their own capital reserves. As other firms scramble to refinance debt that's coming due, these companies fuel growth using their own free cash.

Consumer and corporate spending will remain soft, leading to a lean outlook for the next couple of quarters for these companies. But tech trends make long-term success likely for Atheros and Broadcom.

The companies have earned C grades, meaning "hold," from Ratings. If you can handle the volatility of these stocks, you might be rewarded after the economy recovers.

Prior to joining Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level II CFA candidate.