Is Broadcom A Strong Buy?

| About: Broadcom Limited (AVGO)

Summary

Broadcom is a global leader and innovator in semiconductor solutions for wired and wireless communications.

The future outlook of the industry remains strong and this will positively impact the company’s future earnings.

I will briefly discuss the recent results of the company and identify the reasons behind its good or bad performance.

There are many recent developments that I will discuss in detail and conclude whether the stock price of 30.52 is a good buy or not.

Broadcom (BRCM) is a global leader and innovator in semiconductor solutions for wired and wireless communications. The company has one of the strongest IP portfolios among global fabless semiconductor suppliers as ranked by the Institute of Electrical and Electronics Engineers (IEEE). The company sells products to leading wired and wireless communications manufactures that are structured around three core platforms: broadband communication, mobile and wireless and infrastructure and networking.

The company performed well in 2013 and revenue was $8,305 million compared to $8,006 million the last year. However, the net income declined compared to last year primarily from the impairment charge of purchased intangible asset of $511 million and an increase in research and development expenses associated with their acquisition of LTE-related assets from affiliates of Renesas Electronic Corporation (OTCPK:RNECF). This is not a recurring expense so I believe that in 2014 the company will be able to generate better net income because of the future growth prospects of the company.

Recent Results:

Broadband communication: Total net revenue for the year was $2,220 million compared to $2,156 million last year. The increase was primarily from an increase in the sale of the company's set-top box business.

Mobile and wireless: Total net revenue for the year was $3,919 million compared to $3,809 million last year. The increase in revenue resulted primarily from an increase in the sale of wireless connectivity products worth $78 million.

Infrastructure and networking: Total net revenue for the year was $2,080 million compared to $1,855 million last year. The increase in the revenues was due to an increase in the sales of the company's Ethernet switches, PHYs and controllers of $182 million.

Recent Developments:

New Turnkey LTE Platform:

Broadcom announced a new turnkey LTE platform targeting the growing $300 smartphone market. Broadcom's fifth-generation turnkey platform supports Android's Kit Kat OS and utilizes the company's pin to pin compatible dual core m320 or upcoming quad-core m340 LTE SoC and best in class connectivity and location technology. LTE delivers a significantly enhanced browsing and streaming experience. In fact, LTE users consume 1.5GB of data per month on average which is almost twice the average amount consumed by non LTE users. By offering a turnkey LTE Broadcom is enabling consumers to experience faster browsing and shorter download times and more reliable video streaming. With the help of this achievement the company is projecting that the LTE base band market will register 64% year on year growth in 2014 to reach over 500 million units. Broadcom's turnkey team achieved a design with a very low cost bill of material to enable handset companies to quickly and efficiently take Broadcom's LTE solution to market. Broadcom is one of the only players with a mature carrier-ready multimode LTE SoC. Research shows that 85% of North American mobile subscriptions will be LTE by 2019 so the development and future growth will boost the company's revenues.

Wearable Devices:

Wearable devices such as bands and watches are famous nowadays and demand keeps increasing for wearable devices. There is already a lot of criticisms to how accurate these devices are but Broadcom is confident about its quality of products so that the company announced the BCM4771 chip that is designed to improve GPS accuracy and lower the power consumption of small wearable devices. Bringing location accuracy to fitness trackers represents a key step in the evolution of wearable devices allowing them to move from niche products to mainstream accessories. The BCM4771 will be sampled by manufactures during the first half of 2014. So this development will help the company to charge premium prices to customers who are already facing problems with their old devices. According to ABI Research the wearable market is expected to reach $6 billion by 2018.

Broadcom and Haier:

On January 22nd, 2014, the company announced that its wireless internet chips were being used as part of a new line of smart appliances from Haier. Haier is using its wireless internet connectivity for embedded platforms for a number of smart appliances including internet-connected air conditioners, wine coolers and washing machines. The explosion of connected devices throughout the industry is driving board adoption of the company's WICED platform said the company's senior director. This contract will boost the company's revenues in the coming years.

Future Outlook of the Industry:

  1. The semiconductor industry outlook remains strong forecasting a 4.1% growth in semiconductor sales in 2014 to $317 billion that will increase to $328 billion in 2015.
  2. In 2013, there were 1.9 billion smart phone subscriptions and going forward there will 5.6 billion smart phone subscriptions by the end of 2019.
  3. The company's long-term contract with the world's best companies, Samsung and Apple, will continue to account for a substantial portion of the company's revenue and net income for the coming years.

Conclusion:

In anticipation of the company's recent developments and the industry's future outlook the company is in a good position to produce better results in the future. I offer a strong buy recommendation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.