Broadcom Pushed Lower by Report, Growth Concerns

Shares of communications chip maker Broadcom Corp., which have grown at broadband speeds over the past two years, dropped Thursday to their lowest point in more than a year amid renewed concerns about the company’s future revenue and earnings growth.

Investors reacted a day after the Irvine firm’s largest customer, 3Com Corp., warned investors that it is seeing very disappointing sales in the current quarter.

Broadcom’s stock fell during trading to $40.77 a share Thursday before rebounding to close at $48, down $1.25 a share on Nasdaq.

In the technology industry’s recent meltdown on Wall Street, few tech stocks have fallen from such a lofty perch as Broadcom’s. The company, once the most valued in Southern California, has lost 64% of its worth since early January and more than 82% since hitting an all-time high of $274.75 in late August.

The big trouble for communications chip makers started in November when Cisco Systems Inc. said it would cut back on orders. Cisco was one of Broadcom’s top three customers.

But in January, when Broadcom released its earnings, it seemed to have weathered some of the turbulence that was driving its competitors’ earnings down. Broadcom had doubled its business with 3Com in the last three months of the year, a sudden increase that made 3Com its top customer and cushioned the blow of Cisco’s bad news.

That strategy backfired Wednesday when 3Com warned investors that it too is seeing disappointing sales in the current quarter. The Santa Clara networking company laid off more than 1,000 workers this week. Like Broadcom and other technology companies, 3Com was downgraded by Wall Street analysts, and its stock plunged $1.63, or 17.8%, to close at $7.50 a share Thursday.

In addition, Broadcom was plagued by questions this week about its accounting methods involving five acquisitions last year. Before acquiring them, Broadcom had encouraged the privately held companies to issue their customers warrants--promises to sell stock for pennies a share--in exchange for commitments to continue buying their products. Some accountants and analysts criticized the way Broadcom accounted for the warrants, saying their costs were not fully reflected on the books.

Troubled personal computer maker Gateway Corp. poured salt on Broadcom’s wounds Thursday when the San Diego company said it would pull back from its strategy of pushing networking products, which use Broadcom chips, for the home. Gateway said it will refocus on selling personal computers directly to customers.

Broadcom stock was downgraded by two analysts Thursday, only two days after Goldman, Sachs & Co. analyst Nathaniel Cohn wrote in a note to investors that the industry correction that has plagued the entire communications chip market was “only just beginning.�

Analyst Charles Glavin of Credit Suisse First Boston, who downgraded Broadcom’s stock Feb. 13, said he believes the majority of bad news in the communications chip sector already is out. But that doesn’t mean investors can expect a quick rebound in market conditions any time soon.

What’s “really scary right now,� Glavin said, is that there’s no clear view of future market conditions. Anybody who believes there is a sharp recovery just around the corner “is still drinking the same Kool-Aid they were drinking last summer.�

Broadcom’s woes are “just part of a broad slowdown across the communications chip group,� said analyst Jim Liang of WR Hambrecht.

Competitor Applied Micro Circuits Corp. in San Diego, for instance, lowered its revenue estimates Thursday. The company said it expects to earn between $125 million and $135 million in the current quarter, compared to analysts’ earlier expectations of $175 million. Applied Micro shares, though, rose 10.5%--the news wasn’t as bad as some had expected--to close at $29.06 a share.

And privately, several analysts are predicting that Broadcom too will lower its earnings expectations within days.