Broadcom Stock Slides on Fear Chip Orders Will Fall
Shares of highflying chip maker Broadcom Corp. plunged nearly 20% on Tuesday on fears that one of its biggest customers, Cisco Systems Inc., will buy fewer semiconductors over the next six months. Shares of other chip makers also fell.
The downturn was triggered by a report that Cisco’s parts inventory had increased 59% from the previous quarter, and that its management would try to reduce the amount of components on hand during the next two quarters, suggesting fewer orders will be placed with its semiconductor suppliers.
The report renewed concerns over softening chip demand and sent Wall Street into a selling frenzy of companies that supply semiconductors used in the switches and routers that run the Internet and corporate networks. Cisco, based in San Jose, is the world’s top network equipment provider.
Traders slammed some of the highest-valued technology companies, forcing Broadcom stock to its lowest point since late June and PMC Sierra Inc., based in Campbell, Calif., to its lowest since April.
Hardest hit was Irvine-based Broadcom, which lost $42.50 to close at $176.50 on Nasdaq--its biggest one-day loss ever. The stock traded as low as $172.38 a share during the day in heavy trading that amounted to more than six times the average daily number of shares changing hands over the last three months.
Broadcom’s stock price Monday was 228 times its expected earnings of 96 cents a share this year, an indicator of how much investors are paying for the stock. The ratio dropped Tuesday to 184 times expected earnings. Still, it was much higher than Cisco’s ratio of 76 times earnings.
In contrast, Cisco’s stock price, which Wall Street has been battering for weeks, gained $1.63 Tuesday to close at $56.75 a share.
But its suppliers and other chip makers tumbled. In Nasdaq trading, PMC Sierra fell 17%, or $25.94, to $127.88, also sporting unusually strong volume of 18 million shares. Also on Nasdaq, Vitesse Semiconductor Corp. in Camarillo shed $7.31 to close at $73.06, and Applied Micro Circuits Corp. in San Diego lost $7.50 to close at $68.88 a share.
Broadcom officials said Tuesday that they do not comment on stock fluctuations. The mood at its offices, where hundreds of employees have become millionaires by virtue of the company’s soaring stock price, was described by insiders as subdued, but optimistic.
It’s not clear what impact a prolonged slump in the company’s stock price could have on Broadcom’s aggressive acquisition strategy. Almost since it went public two years ago, Broadcom has used its soaring stock as currency to purchase other technology companies.
In its largest acquisition, announced Monday, Broadcom said it intends to buy fellow chip maker SiByte Inc., based in Santa Clara, Calif. But the value of that deal withered with Broadcom’s share price, shrinking from about $2 billion to $1.6 billion.
Also withering was the net worth of Southern California’s two richest men, Broadcom co-founders Henry T. Nicholas III and Henry Samueli, who each own more than 35 million shares. Each has seen his stock holdings drop from more than $10 billion earlier this year to $6.2 billion on Tuesday.
Cisco is Broadcom’s second-biggest customer behind Motorola Inc., and accounted for 17% of Broadcom’s revenue last quarter, according to Broadcom. PMC Sierra relies on Cisco for 10% to 15% of its revenue, according to a Merrill Lynch research report.
Cisco’s news brought mixed reaction from industry analysts.
“We believe the semiconductor inventory correction is far from over,” said Lehman Bros. analyst Dan Niles.
In a note to clients, Niles said that Cisco plans to maintain current inventory levels for three to four months, “then reduce them as the lead times for Cisco’s own products start to decrease.”
One market analyst, Jim Liang of W.R. Hambrecht & Co., lowered his rating on Broadcom to “buy” from “strong buy.”
“We’re basically becoming cautious near term on the communication chip group in general, based on our fears of a potential inventory correction,” he said.
After the market closed Tuesday, Liang said he wasn’t sure if the market would continue to punish Broadcom.
“That will depend on whether we made the right call,” he said. “If we are wrong, then what happened in today’s market was just a reaction and things will get back to normal. If the call is correct . . . we will expect the stock to stay volatile for a couple of quarters.”
But Merrill Lynch analysts Mark Lipacis and Joe Osha expressed confidence in the sector. Despite near-term weakness in communications chip companies, “the long-term growth drivers for the industry are intact,” they wrote Tuesday.
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Bloomberg News was used in compiling this report.
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Still Pricey?
Even after their Tuesday slide, shares of many chip makers still have relatively high price-to-earnings ratios based on estimated 2000 earnings per share.
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Stock Tues. close 2000 P/E Broadcom $176.50 184 PMC-Sierra 127.88 128 GlobeSpan 50.25 112 Vitesse 73.06 111* Applied Micro 68.88 67 Conexant 28.44 34* Altera 30.44 30
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* Based on actual results for fiscal year ended Sept. 30
Source: Bloomberg News
