- Broadcom 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.
See Our Complete Analysis for Broadcom Here
1. Broadcom With Retain Its Leadership In Connectivity
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
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
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 (
) 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
oftness 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
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
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
a Company's Products Impact its Stock Price at Trefis