Morgan Stanley Takes Closer Look At Broadcom

In a report published Thursday, Morgan Stanley analysts maintained an Overweight rating on

, with a price target of $50, after the comm equipment team, led by James Faucette, had a closer look at the company's 25 GB Ethernet progress. The report highlighted the significant of the upcoming product cycle from Arista for its 25 GB Ethernet top-of-rack switches, which are scheduled to be launched later this year. This could drive "up to $100 mm of incremental revenue opportunity for Arista in 2016," the analysts said. "The switches are likely based on Broadcom's new "Tomahawk" chip which supports the very new 25 Gb Ethernet standard. The 25 Gb product cycle overall should be a positive driver for Broadcom, as the company has silicon out basically at the same time that the 25 GbE standard is being defined. It also opens the door to continue to penetrate Cisco's large ASIC opportunity, as well as several other key data center customers," the analysts explained. Although Broadcom has a major share in the non-Cisco market, which represents a 35% share of the total market. Cisco has always preferred internally developed custom silicon, which has restricted Broadcom's prospects. This trend could be changing, which would give a fillip to Broadcom's revenue and earnings. "We expect Cisco to continue to benefit significantly from its leadership in internal silicon, but at the same time see significant more usage of merchant market silicon in certain areas as an inevitable trend. We think the networking business is positioned to grow nicely in the next couple of years even without incremental Cisco penetration," the report mentioned. The company's shares "trade well below the group despite recent structural improvements to the business," the analysts said, while adding, "We like the longer term growth prospects in the networking business, and we think the discount to the group is largely due to historical M&A that isn't likely to be repeated, historically high stock option expense which is coming down, and share loss in mid range connectivity that we believe is largely behind us."