Skip to main content

Though some analysts remained more cautious, much of Wall Street warmed up to



a day after its upbeat earnings report, as a slew of analysts hoisted their profit estimates and a couple also upgraded the stock.

Broadcom added $2.55, or 18.2%, to $16.60.

Yesterday Broadcom issued robust second-quarter guidance of 12% to 14% sales growth, while it solidly beat revenues and earnings projections.

"We believe the magnitude of the firm's outperformance will likely allow its shares to return to the upper half, if not the high end, of its recent range," said Legg Mason analyst Cody Acree in a note upgrading the shares from hold to buy.

"Broadcom is so broadly diversified that it will be one of the major players" in an economic recovery," he said in a phone interview. "That will drive shares in the near term. The other catalyst will be the removal of the overhang of concerns about the management team." Legg Mason has not done banking for Broadcom.

Yesterday the company said it had drafted a short list of candidates for the CEO post, following the

unexpected announcement in January that longtime head Henry Nicholas would leave. His departure, followed by the exit of the head of its ServerWorks subsidiary, has fueled speculation about turmoil in the ranks of management, which the appointment of a new CEO could help to allay.

But despite the positive signs in the short term, other analysts, pointing to accelerating competition from


TheStreet Recommends

(INTC) - Get Intel Corporation Report

, remain more skeptical about Broadcom's future.

At Pacific Growth Equities, analyst Jim Liang maintained his equal weight rating on the stock. "The revenue guidance was a pleasant surprise, but the near-term strong performance doesn't change the long-term threat from Intel," he said.

Currently, the ServerWorks division of Broadcom claims about 80% market share in the server I/O chipset market, while Intel has only 20%. Server I/O chipsets mediate between the server processor and applications such as storage and memory.

But Intel is expected to roll out a new generation chipset late this year, potentially pressuring Broadcom's dominant market share. "There's always a risk that if Intel's technology is superior, Broadcom's dominance might be incrementally weakened," said Liang.

Besides, he thinks it's too expensive at current levels. Broadcom trades at 35 times his calendar 2004 earnings estimates. That would be a fair multiple assuming a cyclical recovery was in the offing -- but at the moment, it's too soon to call such an upturn, he believes. Pacific Growth has not done banking for Broadcom.

Reflecting similar worries, UBS Warburg is betting the company won't be able to grow earnings in '04 because of competition from Intel, although 2003 looks good. In the wake of yesterday's report, the firm dramatically boosted Broadcom's sales and profit estimates for 2003.

UBS nearly doubled its 2003 estimate for Broadcom's earnings, raising its forecast from 18 cents to 33 cents and its revenue estimate from $1.35 billion to $1.49 billion. It hiked 2004 sales projections, too, up from $1.4 billion to $1.55 billion.

But the firm sounds a more bearish note on Broadcom's '04 prospects. "Our flat earnings growth expectation for 2004 over 2003 reflects our concerns surrounding competition from Intel in server I/O chipsets and Gigabit Ethernet product areas," explained a note from the firm.

Legg Mason's Acree remains more optimistic, though he acknowledges the potential threat from Intel. The ServerWorks division, which contributes between a quarter and a third of Broadcom's revenues, is also a major profit center for the company, he concedes.

"I think Intel will be taking share, but do they take share to the point it becomes a real impediment to Broadcom's growth? That's still an unanswered question," he said.

For Broadcom, he believes the near-term upside potential from an economic recovery outweighs the longer-term threat from Intel.