Broadcom (BRCM) is having a better time in 2014 after a scrappy performance last year. Going forward, it looks like Broadcom will continue gaining momentum with the launch of Apple's (NASDAQ:AAPL) new iPhones and the growth of the LTE handset market, which Broadcom has been targeting with its new products. However, are things as simple as they seem? Or will Broadcom fall prey to Qualcomm's (NASDAQ:QCOM) dominance and fail to make the most of Apple's new devices? Let's see.
Apple isn't a guaranteed driver
When Apple released the iPhone 5S, investors were expecting the company to benefit from its new Wi-Fi chip standard. However, that didn't happen as Apple went with the older 802.11n Wi-Fi standard. Broadcom has been pushing its 5G standard to propel growth, but it hasn't been successful so far as Apple's choice of the older standard shows. In addition, Apple didn't update the latest iPads with Broadcom's 5G Wi-Fi either, suggesting that the tech giant is playing it safe and is going for tried and tested technology.
Moreover, Broadcom recently announced new 802.11ac chips in January this year. Both these chips, the BCM43569 and BCM43602, are based on the 5G standard and are devised to offer Wi-Fi speed and range while reducing the Wi-Fi processing power of the device. These chips can help Broadcom find a slot in Apple's next iPhone. However, it is not a guarantee whether Apple will use Broadcom's latest chips for its upcoming iPhone(s).
Apple didn't upgrade to the latest platform last time even though Broadcom had launched them in January 2013. Since Broadcom announced the BCM43569 and BCM43602 in January once again this time, the same story could continue as Apple would probably go with a tried and tested solution.
Hence, it can be said that success isn't guaranteed just yet and Apple could once again hurt Broadcom by opting for the older platform.
The LTE push could fail
Broadcom recently released low-cost SoCs in order to bring fast LTE speeds to budget phones. The company is looking to target this market with its M320 and M340 integrated LTE chips. These new chips from Broadcom are targeted at affordable 4G smartphones with prices below $300. The dual-core M320 and the quad-core M340 chips will come with native support for Android KitKat.
Apart from these chips, last year in September, Broadcom announced the acquisition of Renesas Electronics for $164 million. The primary reason behind this acquisition was Broadcom's intention of entering the LTE market as soon as possible.
Before the acquisition of Renesas, Broadcom did not have any integrated LTE SoCs, so it gave the company products to enter this space. However, bigger peers such as Qualcomm are already into this market for a long period of time.
According to Strategy Analytics, Qualcomm enjoys a very dominant position in the LTE market with two-thirds of the total revenue. Qualcomm's $14 billion R&D investment over the last four years has helped the company gain more than 95% revenue share in the LTE baseband segment. So, Qualcomm is the undisputed leader in this segment and has an advantage over Broadcom as far as low-cost LTE chipsets are concerned.
In December last year, Qualcomm launched the Snapdragon 410 chipset with integrated 4G LTE world mode for high-volume smartphones. According to Qualcomm's press release -
"The delivery of faster connections is important to the growth and adoption of smartphones in emerging regions, and Qualcomm Snapdragon chipsets are poised to address the needs of consumers as 4G LTE begins to ramp in China. The new Snapdragon 410 chipsets are manufactured using 28nm process technology.
They feature processors that are 64-bit capable along with superior graphics performance with the Adreno 306 GPU, 1080p video playback and up to a 13 Megapixel camera. Snapdragon 410 chipsets integrate 4G LTE and 3G cellular connectivity for all major modes and frequency bands across the globe and include support for Dual and Triple SIM. Together with Qualcomm RF360 Front End Solution, Snapdragon 410 chipsets will have multiband and multimode support."
Hence, Broadcom faces a very strong challenge from Qualcomm, which is ahead of it in the LTE space. So, it is still uncertain if Broadcom can execute a turnaround.
With a trailing P/E ratio of 42 and an earnings decline of 33% in the previous quarter, Broadcom is overvalued. The company's business is under threat from Qualcomm and since it hasn't gained much traction at Apple either, the future looks bleak. So, it would be wise for investors to avoid an investment in Broadcom since its business is not doing well.
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.