Broadcom Reaches $47 On These Key Drivers

Broadcom (NASDAQ:BRCM), a global leader in semiconductors for wired and wireless communications, provides the industry’s broadest portfolio of system-on-a-chip (SOC) and software solutions to manufacturers of computing and networking equipment, digital entertainment, broadband access products, and mobile devices. Over the last year, the stock has been hovering in the range of $32-$39. However, we are of the view that the market fails to recognize the strong fundamentals of the company, giving it a valuation hard to ignore.

Our price estimate for Broadcom stands at $47.21, a premium of around 40% to the current market price. Here, we discuss in detail certain factors that drives our rationale for the same.

See Our Complete Analysis for Broadcom

1. Broadcom To Retain Its Leadership In Wireless Connectivity

With wireless connectivity being ubiquitous in almost all electronic devices such as PC, consumer, communications and automotive segments, the market is seeing significant growth. We believe, that smartphones and tablets will replace PCs as future growth engines in the semiconductor market and on account of standardization of connectivity solutions such as WiFi, Bluetooth, FM and GPS applications in these devices, the wireless connectivity market will also register a y-o-y growth rate.

According to research firm Gartner, the worldwide mobile device sales to end users will grow by about 7 % in 2012, mainly fueled by growth in smartphones and tablets. ^[1]

In addition to the growth in mobile devices, the introduction of new technologies will further drive applications in this market. Thus, we estimate the wireless connectivity market to cross the $20 billion mark by the end of our forecast period, registering an annual growth rate of 17%.

Historically, Broadcom has enjoyed major success with its connectivity solutions in cell phones, most notably the main WLAN slot in the iPhone. With a majority share in the mobile wireless market, Broadcom is the undisputed leader in mobiles and tablets, being present in the Apple iPad, Samsung Tab and Motorola Zoom. (See Related Article: Apple’s Next Generation iPhone Will Carry Broadcom Wi-Fi Chips)

Additionally, it extended its lead in 5G Wi-Fi solutions, with Netgear announcing industry’s first 5G Wi-Fi router powered by Broadcom. We believe that the move will give Broadcom further stability in this segment and estimate its market share to remain around 36% till the end of our forecast period. (See Our Article: 5G Wi-Fi Solutions To Help Broadcom Defend Leadership In Wireless Connectivity)

2. Broadcom Could Benefit From Texas Instrument’s Exit From The Baseband Market

Leveraging the growth in demand for smartphones and tablets, we estimate the baseband and application processor division of Broadcom to register an annual growth rate of 12%, till the end of our forecast period.

With a market share of 40% and 50% in the mobile baseband and application processor market respectively, Qualcomm (NASDAQ:QCOM) remains the leader in both. However, with Texas Instrument completely exiting the baseband market in 2012, there is a gap to be filled in the market. We believe, that Broadcom is in a good position to leverage this opportunity as it already supplies baseband for Nokia and Samsung, two of TI’s biggest baseband customers.

We forecast a 2% gain in Broadcom’s market share in 2012, while we estimate the same to be constant around 7% throughout the forecast period.

3. Enhanced Infrastructure & Networking Portfolio Post The NetLogic Acquisition.

With NetLogic, Broadcom acquired a leading multi-core embedded processor solution, market leading knowledge-based processors, and unique digital front-end technology for wireless base stations, that are key enablers for the next generation infrastructure build-out.

We feel that the company is now better positioned to meet growing customer demand for integrated, end-to-end communications and processing platforms for network infrastructure. The addition of NetLogic’s 700 plus patents to Broadcom’s more than 15,000 patents will help it retain its footprint in this segment and lead to a potential increase in its addressable market.

Since we have already updated our model to show Broadcom’s ownership of NetLogic pro forma, we estimate its market share to remain constant around 61% for the rest of the review period.

4. Broadcom Bolsters Its Product Portfolio With BroadLight Acquisition

The acquisition of BroadLight gives Broadcom access to the former’s market leading Gigabit Passive Optical Network (GPON) technology and makes it well positioned to offer service providers complete solutions across the access spectrum from DSL to cable to PON. Broadcom believes that PON is a fast growing segment and estimates the subscriber base growth to be above 20% per year. (See our Article: Broadcom Acquisition of Broadlight Bolsters Product Portfolio)

Additionally, Broadcom has meaningfully expanded its footprint in the service provider market by announcing powerful new products such as the world’s highest density scalable 100-Gigabit Ethernet switching solution and next-generation high-performance stackable enterprise switches.

We believe that the breadth of Broadcom’s offerings and its wide reach provides it an edge over its competitors; and thus estimate its market share to remain around the current level of 31% for the rest of our forecast period.

Potential Risks: Increased Threat From Qualcomm, High Switching Costs In Baseband

With the recent acquisition of Atheros, Qualcomm now has the ability to sell its chips into all tablets, whether they are 3G, 4G or Wi-Fi/Bluetooth. If this opportunity works well for Qualcomm, Broadcom faces a potential risk of losing out its current dominance in the wireless segment. If its market share drops down to 25%, we could see over 10% downside in our price estimate.

The switching cost in the cellular industry of changing to a different baseband supplier is extremely high. Therefore, there remains a risk of manufacturers choosing a bigger player for long term supplies. In case Broadcom does not achieve the 2% rise in market share as expected by us, there could be a slight downside to our price estimate.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Gartner Says Worldwide Smartphone Sales Soared in Fourth Quarter of 2011 With 47 Percent Growth, Gartner Press Release, February 15, 2012 [↩]