Broadcom Looks Cheap As Earnings Near Despite Tough Macro

Broadcom (NASDAQ:BRCM), a global leader in semiconductor solutions for wired and wireless communications, plans to announce its Q2 2012 earning on Tuesday, July 24. While most semiconductor companies posted a decline in their revenues last quarter, Broadcom was able to hold its ground on account of additional revenues from Netlogic Microsystems.

The soft macroeconomic conditions and lower demand from Europe and China, has slowed down the revival in the semiconductor industry. However, with additional revenue stream from NetLogic, growing stability in the wireless connectivity segment and the introduction of new broadband platforms for international and developed markets post the Broadlight acquisition; we believe, that Broadcom once again will be able to weather the harsh macro economic conditions this quarter.

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Expansion Of Addressable Market With NetLogic Acquisition

The completion of the acquisition of networking chipmaker NetLogic Microsystems in February 2012 has expanded Broadcom’s addressable markets for infrastructure solutions. Equipped with NetLogic’s leading multi-core embedded processor solution, market leading knowledge-based processors and unique digital front-end technology for wireless base stations, Broadcom 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 the latter retain its footprint in this growing segment and lead to a potential increase in its addressable market. We estimate Broadcom’s share in the infrastructure and networking market to remain at a constant level of 61% till the end of our forecast period.

5G Wi-Fi Solutions To Help Defend Leadership In Wireless Connectivity

While Qualcomm might be the supreme player amongst the two in the mobile baseband market, Broadcom clearly dominates the wireless connectivity segment with over 35% market share. However, the Atheros acquisition gives Qualcomm the added ability to sell its chips into all tablets, whether they are 3G, 4G or Wi-Fi/Bluetooth and also puts the company in a better position to offer integrated SoCs that can compete with Broadcom’s offerings.

However, by extending its lead in 5G Wi-Fi solutions early this year, Broadcom has further enhanced its broad product lineup. 5G Wi-Fi has the potential to become one of the most influential mobile and wireless technologies in years to come, and the early move by Broadcom could give it an added advantage in the market. This, combined with continued growth in advanced 3G solutions, should help the company retain its footprint in this segment.

Moreover, last quarter the company claimed that it saw the cross-over from 2G to 3G earlier than it expected. Thus, we expect the impact of softness in 2G and multimedia coprocessors to not significantly offset the growth in other division this quarter.

The wireless connectivity and mobile baseband divisions contribute close to 54% to our current price estimate of $47.21 for Broadcom. Thus, for the company to sustain its attractive valuation it is important for it to hold its market share for the rest of the forecast period. (Read Related Article: 5G Wi-Fi Solutions To Help Broadcom Defend Leadership In Wireless Connectivity)

Enhanced Broadband Portfolio Post Broadlight Acquisition

The acquisition enables Broadcom to offer a complete, end-to-end GPON solution to its customers from the optical line terminal (OLT) at the central office to the optical network unit (ONU) at home. Broadcom is now 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 with subscriber base growth forecast to be above 20% per year.

Keeping in mind the record design wins in Q1 across all three segments, we believe Broadcom’s product competitiveness is higher than it has ever been and remain optimistic on the future performance of the company.

Our price estimate of $47.21 stands at a premium of around 50% to the current market price.

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