We recently downgraded our rating on chipmaker Broadcom Corporation (BRCM) to Neutral from Outperform, ahead of the second quarter results, which are expected on July 27, 2010.
 
Broadcom consistently introduced its highly integrated solutions in some of the fastest growing markets in the technology sector. Broadcom continues to benefit from improved year-over-year global demand and the secular trend of increasing need for data, video and multimedia processes. The recovery from the lull of 2009 has been quite strong for Broadcom.
 
The top line has been steadily increasing in the last four quarters. Broadcom recorded a 71% year-over-year top-line growth in the first quarter of 2010 and an 8% sequential growth. The growth in revenue was driven by new product ramps and continued strong demand from customers in Asia.
 
The Broadband Communications segment continues to show strength driven by an increase in demand for digital set-top boxes and broadband access equipment. IP set-top boxes are expected to be one of the fastest growing markets in 2010.
 
Management remains upbeat about the recent legislative changes in China, allowing cable operators to offer voice and data services along with a nationwide push to increase high definition broadcasting throughout the country. This should result in a significant increase in orders for set-top box chipsets from Chinese customers.
 
Going forward, management expects revenues to be up approximately 5% to 12% in the second quarter driven by broadband and mobile and wireless segments. However, we remain concerned about the pressure on margins due to the accelerated new product ramps, which typically carry lower margins early in the product lifecycle.
 
In the last six months, the stock has had a good run, carving a steady growth path. Although the Zacks Consensus Estimate for 2010 has gone up, we move back to our Neutral recommendation as we believe most of the positive factors have already been discounted at current price levels and see limited upside potential.
Read the full analyst report on “BRCM”
Zacks Investment Research