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Broadcom Has 2nd Bad Day in Row on Wall St.

Internet: The Irvine chip maker's shares fell $24.69 on Wednesday, bringing its two-day drop to 31%.

November 09, 2000|From Times Staff and Wire Reports

Shares of communications chip maker Broadcom Corp. tumbled an additional 14% Wednesday amid continuing concerns that one of its major customers, Cisco Systems Inc., will cut down on orders.

Broadcom shares have fallen nearly 31% in the two days since San Jose-based Cisco disclosed its mounting inventory problem and its decision to reduce the number of components on hand.

The Irvine manufacturer's stock lost $24.69 Wednesday to close at $151.81 a share. The company's overall value has plunged to about $34 billion from a high of roughly $60 billion in late August.

"As the shares are highly valued, they're also highly vulnerable," said analyst Thomas Smith of Standard & Poor's Equity Group. "The possibility that Cisco could be buying less brings uncertainty to Broadcom's future sales."

A prolonged slump in Broadcom's stock price eventually could affect its ability to buy other companies, analysts said.

Broadcom has become the fastest-growing company in its industry mainly because of its aggressive acquisition strategy, which has relied on its soaring stock price as currency to buy 11 firms so far this year.

"It's a lot easier to fund acquisitions when you have a high share price," Smith said.

The value of three transactions still pending, including a $2-billion deal announced Monday, its biggest ever, has dropped dramatically. The latest deal, for chip maker SiByte Inc. in Santa Clara, is now worth $1.4 billion.

Some analysts believe Cisco's growing inventory, disclosed among an otherwise glowing quarterly earnings report Monday, will hamper suppliers like Broadcom.

Smith said Broadcom relies on too few customers for its sales. Last year, five customers accounted for two-thirds of its revenue, with Cisco representing 15%, he said.

"Something like that is probably still true, and if the customers are as big as Cisco, they may also have inventory overhead problems," he said.

But other analysts say the market is overreacting.

Cisco may account for a large portion of Broadcom's sales, but given the depth of Broadcom's product line, the company will still be able to grow rapidly, said Mark Edelstone, a Morgan Stanley Dean Witter analyst.

"We do not see Cisco's inventory affecting this quarter's earnings or the next quarter's earnings," Edelstone said. "Their product line increased with their acquisitions and will continue to do so."

Edelstone expects Broadcom to meet Morgan Stanley's earnings expectations of $1.02 a share for this year and $1.50 a share for next year, before acquisitions that haven't closed. An average of 20 analysts' estimates puts the annual earnings at 97 cents a share, according to Zacks Investment Research.

Indeed, Broadcom's stock price is still very strong. It was 158 times its expected earnings this year, according to Zacks, while Cisco's closing price of $52.13 Wednesday was 69.5 times its expected annual earnings of 75 cents a share. The ratio indicates the relative price investors are paying for stocks.

Dow Jones Newswires were used in compiling this report.


Big Gains, Quick Drop

Broadcom's stock doubled this year through late August. But it has since plummeted about 44%, most if it coming this week amid worries about future sales to oversupplied companies like Cisco Systems Inc. A look at the last three months:

High: $273.63

Wednesday's close: $151.81

Source: Bloomberg News

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