- Broadcom (BRCM) gained additional market share in all of its business segments in 2012 – connectivity & baseband, network solutions and broadband.
- Though the short-term growth will be impacted by macro headwinds, we believe Broadcom has strong fundamentals to support a higher valuation.
- Broadcom will retain its market leadership in connectivity solutions for mobiles and tablets, and it expanded its wireless product portfolio with NFC quad-core chips and will launch the first 5G Wi-Fi smartphone in a few weeks.
- Strengthening 3G business and LTE compatibility can increase Broadcom’s market share in the baseband and application processors market.
- Softness in data center & lower enterprise spending led to a decline in Broadcom’s networking business, but it has expanded its addressable market with an enhanced product portfolio and will witness growth as the economic situation improves.
- The company will benefit from strong demand for advanced set-top boxes in developed countries.
Despite an annual contraction in the overall semiconductor industry, Broadcom closed its fiscal 2012 with an 8% increase in annual revenues as it gained additional market share in all of its business segments – connectivity & baseband, network solutions and broadband. However, it marked a 22% annual decline in net income in 2012 on account of higher operating expenses.
While we agree that macro headwinds might limit Broadcom’s short-term growth, we believe in its long-term growth potential. With strong cash flows, a robust product road map for 2013 and beyond as well as accelerating design wins across business segments, we believe that Broadcom has strong fundamentals to support a higher valuation.
Our price estimate of $43.78 for Broadcom is at a premium of over 20% to the current price estimate. In this article we discuss certain key trends and factors that can lift Broadcom’s stock in the future.
1. Broadcom With Retain Its Leadership In Connectivity Solutions
Accounting for a majority share in the mobile wireless market, Broadcom is the market leader in mobiles and tablets with a presence in the Apple iPad, Samsung Tab and Motorola Zoom. The company has enjoyed major success with its connectivity solutions in cell phones, most notably the main WLAN slot in the iPhone. Broadcom shipped around 200 million connectivity combos in Q4 2012 alone and its wireless connectivity solutions grew faster than its overall mobile and wireless business in 2012. Smartphones and tablets market is the fastest growing segment in the semiconductor industry, and the former represents the majority of Broadcom’s connectivity business.
Broadcom announced the extension of its 5G Wi-Fi chips from routers to smartphones and tablets in 2012 and plans to launch the first 5G Wi-Fi smartphone in a few weeks. The company also expanded its wireless product portfolio with NFC quad-core chips which targets growth in mass market mobile phones as well as high-end mobile phones and devices. We estimate Broadcom to retain its share in the connectivity market over our review period.
2. Expanding Mobile Product Portfolio
Historically, Broadcom has lagged in the baseband and application processor market and currently accounts for only 4% of the market. 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 and its 3G baseband shipments marked over 600% y-o-y growth in the first half of 2012.
Broadcom’s 3G business has strengthened with the ramp up of 40 nm platform. It also introduced its new 3G smartphone platform recently, which offers strong performance capabilities at faster data speeds and features the industry’s first dual-core HSPA (high speed packet access) processor for affordable smartphones. In its last earnings call, Broadcom highlighted that some of its customers will ramp a higher number of mid-range and higher-end smartphones with its dual-core products in the coming quarters, which command a meaningful ASP premium.
Earlier this year, Broadcom licensed the ARMv7 and ARMv8 chip architectures that enable the company to build its own application processor based on leading ARM technology. Additionally, earlier this year, 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. (Read: Brodcom’s Vying For Greater Share Of The LTE Baseband Market With New Chip)
Though Qualcomm (NASDAQ:QCOM) remains the leader in the baseband & application processor market, it faces an increasing threat from Broadcom’s success in the low-end Android smartphone market. We think that the LTE compatibility further strengthens Broadcom’s product portfolio and estimate its market share to marginally increase in the future.
3. Softness In Data Center & Lower Enterprise Spending Is A Short-Term Trend
On account of reduced data center and enterprise spending as well as lower service provider capital expenditures last year, Broadcom marked an 8.5% sequential decline and anticipates the weak demand to persist this quarter as well. We think that macro headwinds combined with seasonal variations are responsible for the slowdown and believe that Broadcom has the capacity to retain its foothold in the infrastructure and network market in the future.
In addition to introducing the first 28 nm multicore network chip last year, Broadcom also launched the latest generation of Ethernet switches for the enterprise market, which are optimized to address increasing workforce mobility. Equipped with NetLogic’s leading multi-core embedded processor solution, Broadcom has managed to expand its potential addressable market and earn higher revenue from the infrastructure and networking market.
We believe that Broadcom has the requisite IP to meet the growing customer demand in the network market.
4. Increasing Strength In The Set-Top Business
With 15% higher set-top box shipments, Broadcom gained additional market share and delivered strong growth and profits throughout 2012. It benefits from strong demand for advanced set-top boxes in developed countries as service providers aggressively transition their subscribers to advanced services and emerging markets continue to increase their digital transition.
Solid secular trends and Broadcom’s innovations continue to fuel its set-top box business. The company witnessed a number of positive developments last year and offers service providers a complete solution across the access spectrum, from DSL and cable to PON.
Disclosure: No positions.