This article is the third in a series of four articles dedicated to following up on our October 15, 2013 article "4 suppliers and an ETF set for Apple boost", whereby we recommended buying Apple, Inc. (AAPL) in addition to its suppliers Skyworks Solutions Inc. (SWKS), Qualcomm Incorporated (QCOM), Micron Technology Inc. (MU) and Broadcom Corp. (BRCM). Furthermore, we also recommended buying Vanguard total stock market index fund (VTI).
Since the publication of such article, Broadcom shares have appreciated by 64.56% (on a dividend and split adjusted basis) from from $26.21 on October 14, 2013 to to $43.13 on November 28, 2014. In the first article of the series, "Up 169%, is Apple supplier Skyworks still a buy?", we provided our current outlook on Skyworks, while, we also provided the performance of all of the above referenced stocks since the publication of our 2013 article, whereby Skyworks has appreciated by 169.45% , Apple has appreciated by 72.36%, Broadcom has appreciated by 64.56%, Qualcomm has appreciated by 10.44% and the Vanguard total stock market index fund has appreciated by 21.9%. Furthermore, we also provided a comparison to the major stock indices whereby the Dow Jones industrial average has appreciated by 15.51%, the S&P500 index has appreciated by 20.9%, and the NASDAQ index has appreciated by 25.59%. Meanwhile, in the second article of the series, "Up 110%, is Apple supplier Micron still a buy?", we also provided our current outlook on Micron.
Although Broadcom's appreciation is less than Skyworks and Micron, its appreciation of over 64% since October 2013 is quite impressive; most analysts last year were expressing serious concerns about Broadcom's future revenues, while we had set aside such concerns, recommending buying Broadcom shares. At this time, is this a good level to book profits by selling Broadcom shares, or could there be additional meaningful appreciation?
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Broadcom stock performance 10/2013 to 11/2014 vs. Indices - Source: Yahoo Finance
As per our 2013 article, Broadcom Corporation offers semiconductor solutions for wired and wireless communication with system-on-a-chip and embedded-software solutions for voice, video, data and multimedia connectivity. Broadcom's chips are used in Apple products (such as the BCM5976 touch-screen controller chip used in the iPhone 5s, Broadcom BCM5976 Touchscreen Controller used in iPhone 6, and Broadcom BCM5976 Digitizer Controller used in iPad Air 2), as well as in products offered by other mobile manufacturers. It also provides chips that are used in television set-top boxes supplied by satellite and cable TV service providers, while it also provides chips for wireless phone network equipment.
Broadcom is also expected to accelerate its future revenues from growth associated with the Internet of Things, estimated to grow into a $19 trillion market in the years to come. Upon its announcement in November of creating a network of more than 40 channel partners to serve accelerating IoT and Ethernet markets, Broadcom emphasized:
"As the IoT market continues to evolve, we're seeing increased demand from thousands of emerging developers wanting to get their hands on our low-cost, highly integrated development platforms, modules and resource materials," said Vincent Brocato, Broadcom Senior Director, Global Channel. "By making our technology easy to use and widely available through our expanded global channel, companies both large and small now have immediate access to the technology and tools required to bring their innovative ideas to life."
Broadcom's market capitalization currently stands at $25.53 billion. With average analysts' earnings estimates of $2.93 per share for the year ending December 2014 and $3.28 for the year ending December 2015, Broadcom currently boasts price/earnings ratios of 14.72 and 13.15 respectively. During the past 90 days, analysts have revised their earnings estimates for Broadcom higher by 9 cents for 2014 and 2 cents for 2015. Broadcom's 2014 P/E ratio has increased substantially from its level of 10.07 in October 2013 to its current level of 14.72. Meanwhile, Broadcom's 2014 earnings are currently expected to come in about 18 cents higher than where they were forecast in October 2013. Despite such outperformance, the current expansion in Broadcom's P/E ratio does seem substantial.
Broadcom has experienced solid momentum during the past several months, further fueled by an upgrade from Goldman on November 13, 2014. From a technical perspective such momentum could carry the stock further, as Broadcom's momentum as measured by its 14-day Relative Strength Index currently stands at about 66; hence still shy of 75, a level that would otherwise indicate that the stock is becoming overbought in the short term.
Furthermore, due to strong demand for the iPhone 6/6 Plus, we are currently expecting Apple revenues to exceed estimates by about 8%, as per article we published 11/25/2014 "Apple: $800 done, $1,000 pre-split next?", which would also benefit Broadcom components sales. Nevertheless, from a valuation perspective, we do believe that Broadcom's P/E ratio has had a substantial increase, capturing such factors, and hence we would favor booking profits at current levels by selling Broadcom shares.