Following Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC), Broadcom (BRCM) became yet another company to challenge Qualcomm's (NASDAQ:QCOM) long-term dominance in the LTE baseband market. Earlier this month, Broadcom announced its first LTE-compatible baseband chip (BCM21892) that it claims to be 35% smaller compared to current products, making it the industry's smallest 4G LTE chip in the market. The smaller chip size not only makes it cheaper to produce, but also more power-efficient. The company will showcase the BCM21892 modem at the Mobile World Congress show in Barcelona this week.
The 4G LTE modem along with Broadcom's leading Wi-Fi, Bluetooth, GPS, and NFC technologies provide manufacturers with a comprehensive product offering needed to build advanced mobile devices. Broadcom customers are currently testing the LTE modem and production is expected to begin in 2014.
4G/LTE is the future of wireless connectivity for mobile devices, especially smartphones, and the dominance in the production of LTE chips has enabled Qualcomm to lead the smartphone market so far. We believe that LTE compatibility will help Broadcom expand its penetration in the baseband market, though increasing competition in the space remains a big threat.
Historically, Broadcom has lagged in the baseband and application processor market. However, the company has registered a marginal increase in its market share over the years. According to Strategy Analytics, Broadcom continued to improve its product mix and ranked fourth in the cellular baseband market in the first half of 2012. Its 3G baseband shipments marked an over 600% year-over-year growth in the first half of 2012.
Though Qualcomm remains the leader in the baseband and application processor market, it faces an increasing threat from Broadcom's success in the low-end Android smartphone market. We feel that the LTE compatibility further strengthens Broadcom's product portfolio.
Rapidly Expanding LTE Network
The rapid increase in global smartphone shipments has significantly expanded the cellular baseband market over the years. The first half of 2012 witnessed a 15% increase in the baseband market. Of the various technologies that are driving the market currently, LTE is seeing the strongest growth as carriers around the world increasingly shift to the new standard for wireless communication.
Qualcomm Remains the Market Leader; Increasing Competition From Other Players
Dominating the production of LTE chipsets, Qualcomm continues to lead the baseband market. The LTE leadership has allowed Qualcomm to command the majority of the smartphone market so far and the introduction of its new Snapdragon processors will further increase its competitiveness in the market. Qualcomm claims to have already bagged a significant number of design wins for its Snapdragon 800 and Snapdragon 600 processors.
The new Snapdragon lineup, which will be available in commercial devices by mid-2013, are estimated to deliver as high as 40% improved performance compared to Qualcomm's S4 Pro processor. In addition, Qualcomm is expected to introduce an upgrade to its third-generation LTE solutions later this year. Broadcom's LTE solution will be commercially available only in 2014, by which time Qualcomm could gain additional market share.
With the rapidly expanding LTE network, an increasing number of chip players are entering the market. Nvidia introduced its Tegra 4 family, which features built-in 3G and 4G/LTE communication technologies, to make a deeper foray in the smartphone and tablet market. Intel recently announced the availability of its first multi-mode and multi-band LTE chip by the first half of 2013.
Our price estimate of $43.78 for Broadcom is at a premium of over 20% to the current market price.
Disclosure: No positions.