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What's Behind the Chip Rally?

Shares of communications chip makers Agere Systems (NYSE: AGR/A), Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC), and Broadcom Corp. (Nasdaq: BRCM) skyrocketed yesterday, leading a major rally in the sector.

Broadcom led the charge, and its latest earnings report on Wednesday seemed to be a catalyst. In trading yesterday, Broadcom moved to $16.60, up $2.55 (18.15%); AMCC closed at $3.97, up $0.59 (17.43%); and Agere hit $1.65, up $0.21 (14.58%).

On Wednesday, Broadcom announced earnings that were in line with, or better than, analysts' expectations (see Broadcom Reports $69.7M Loss). Revenues of $327.5 million were up 10.7 percent sequentially, and net loss was sizeably reduced.

Broadcom execs said next quarter should be even better, making Wall Street smile. "Management's 12 percent to 14 percent sequential growth estimate surpassed our highest expectations," cooed analyst James Jungjohann and colleagues at CIBC World Markets, in a client note this week. He's raised the company's stock price target from $16 to $18.

At least one source warns against getting too enthusiastic about Broadcom's earnings. According to Christopher Bulkey, an independent financial analyst in West Chester, Pa., Broadcom's still unprofitable and has much work to do. He thinks the latest results may not be quite as rosy as management is touting, since some of the upside may be owing to the timing of one-time charges, as opposed to an actual improvement in financial performance.

Still, there are those revenues... In that regard, Broadcom's surge isn't just about one company. It signals market growth in key areas. Broadcom has excelled in high-speed LAN chips, for instance, where OEMs such as Cisco Systems Inc. (Nasdaq: CSCO), Extreme Devices Inc., Force10 Networks Inc., and Foundry Networks Inc. (Nasdaq: FDRY) eye increased development of data-center and enterprise broadband gear (see PHY Chips).

Broadcom's also getting active in wireless LAN chips, which seems to be on the rise, as gearmakers like Extreme and Nortel Networks Corp. (NYSE/Toronto: NT) get involved (see Extreme Hatches Switch Surprises and Nortel Preps 'Security Switch').

Competitors in key areas like these, such as Agere and AMCC, are sharing the joy, even though both have different financial profiles that put their share prices lower than Broadcom's (see PHY Chips and AMCC Introduces Columbia Chips). Agere and AMCC, for instance, rely on OEMs that market largely to the suffering telecom sector, whereas Broadcom does not.

The upbeat earnings report is the latest of several items that have put Broadcom in the headlines, sometimes in a negative way. Patent litigation with Microtune Inc. furrowed some brows (see Broadcom Gets Microtune Investigated). And back in January, founder Henry T. Nicholas relinquished his CEO post to board member Alan E. "Lanny" Ross until a permanent chief could be found -- even as the company declared itself through the worst of the market downturn (see Big Day at Broadcom).

Executive issues could be feeding the latest stock surge. This past Wednesday, execs declared Broadcom had narrowed its CEO search to three candidates. Elsewhere, rumors were rampant that one of these was Rich Templeton, executive VP and COO of Texas Instruments Inc. (NYSE: TXN). There was also talk that Templeton had withdrawn from the race, stirring up speculation that TI might by trying to merge with Broadcom.

Rumors aside, yesterday's upswing appears to carry a key message -- namely, that, because chip sales have experienced an uptick, it could mean that growth is on the horizon for networking companies tuned into certain areas. Broadcom, which creates the parts needed for 10-Gbit/s LANs, wireless, and broadband equipment, stands as a gauge of the rumblings afoot.

— Mary Jander, Senior Editor, Light Reading

GO_PHOTON 12/5/2012 | 12:12:21 AM
re: What's Behind the Chip Rally? > Elsewhere, rumors were rampant that one
> of these was Rich Templeton, executive
> VP and COO of Texas Instruments Inc.
> There was also talk that Templeton had
> withdrawn from the race, stirring up
> speculation that TI might by trying to
> merge with Broadcom.

If such merge is to happen, it should give
him more incensive to take the CEO job, right ?
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