Broadcom’s (BRCM, Financial) is moving in the right direction. This is evident by impressive results that the company posted in the second quarter. Broadcom is now focusing on hitting new levels in the broadband business. With the future looking bright and good earnings growth momentum in tow, Broadcom is seeing good improvements. Let us check the overall business and see how Broadcom could perform.
Is it going on the right track?
Broadcom seems to be on right track. It is making efforts to explore profitable businesses and shut down the businesses incurring losses. It is focusing on various aspects to improve its profitability and narrow the loss. In this respect, Broadcom is aggressively shifting its focus solely toward the broadband business rather than the cellular baseband business, which is continuously incurring losses. Further, the company plans to wind or shut down the cellular operations.
Broadcom has recently announced that it will sell an operation which had been making baseband chips for mobile devices. To improve the profitability, Broadcom is terminating about 2,500 employees to eliminate the nonperforming units. This will enable the company to focus on its core strengths and priorities quickly. It has started to execute this plan to exit and is expecting ongoing customer commitments to decline over the rest of the year.
Where is it focusing?
Broadcom is focusing minutely on the broadband, connectivity and infrastructure markets to improve its position and financial position. It is making impressive innovations to catch customers' attention. In respect to this, Broadcom is driving a new 25-gig Ethernet switch standard. This will help customers manage the exponential growth of traffic in the data center.
In addition, with the growth of automotive segment in the U.S., Broadcom is also seeing many bright opportunities with a booming automotive segment. Moreover, Broadcom is also making a transition to HEVC and Ultra HD with engagements around the global market. Also, Broadcom is seeing good traction and it is gaining considerable market share in PON.
Moving on to the connectivity segment, the company, with its cutting-edge features, is holding a good position in the smartphone and the tablet market. Further, Broadcom is bringing in new low-power connectivity solutions for the growing internet of things market. With this, the company wants to support iBeacon and HomeKit.
With such a move, Broadcom is focusing on strengthening and diversifying its business. It is also expecting a better performance by its set top box franchise, which is performing well and showing positive momentum. It has improved by a good 8% in the past, which has happened mainly due to share gains in the emerging markets with the rampup of some exciting features such as multi-stream transcoding and a stronger mix of MoCA-enabled platforms.
Moving ahead, Broadcom is planning to close or consolidate up to 18 company locations and terminating certain contracts. It is planning to further cut about 2,250 jobs and take about $225 million in additional restructuring charges over the next year. This shedding of the baseband-chip business is expected to save about $700 million annually.
Conclusion
Examining the fundamentals, with a trailing P/E of 59.16, Broadcom does appear slightly overvalued. Looking at the facts, it can be understood that the company will need some time to improve. It will take some time to fully transition in to the broadband business. But the decent growth in the earnings also indicates that the stock has enough steam. So it can be a good pick as of now.
