Broadcom (NASDAQ:BRCM), a global leader in semiconductors for wired and wireless communications, posted a healthy Q2 2012 with a 8% sequential rise in revenues amid macroeconomic headwinds. The company registered a higher than expected growth rate in its mobile and wireless division, growing 3% sequentially primarily due to the growing strength in wireless connectivity and 3G baseband. (Read Our Article: Broadcom Looks Solid Amid Macro Headwinds)
We estimate the “wireless connectivity and baseband applications” division to contribute over 50% to our current price estimate of $45.99 for Broadcom; the company accounts for over 35% of the wireless connectivity market. Broadcom recently announced the extension of 5G Wi-Fi chips from routers to smartphones and tablets which is expected to commence by early next year. We believe that with leading integrated SoC capabilities and 5G Wi-Fi solutions, Broadcom has the capability to retain its foothold in the wireless market. However, increased threat from Qualcomm’s (NASDAQ:QCOM) Snapdragon processor and the recent acquisition of CSR’s handset technology by Samsung (NASDAQ:SSNLF) could serve as major roadblocks for Broadcom in the wireless communication segment.
Broadcom Introduces 5G Wi-Fi Chips For Smartphones & Tablets
Broadcom recently announced its new chipset with which it plans to bring 802.11 ac Wi-Fi to smartphones and tablets by early next year. The new Wi-Fi technology is designed to provide three to four times the performance of current 802.11 n products and can transmit and receive data faster than its predecessor. Additionally, the new chip will be more power efficient, include a 802.11 ac radio that will be backward compatible, and include bluetooth and FM radio. Though the new standard offers a number of advantages, it is also expected to command a premium of almost 50% versus 802.11 n. 
Though the Wi-Fi alliance is expected to start certifying the products with the new standard in the first quarter of 2013, Broadcom is already shipping silicon for laptops and routers based on the same technology. The continued momentum around the 5G Wi-Fi ecosystem saw new product announcements in Q2 including access points from Cisco (NASDAQ:CSCO), Netgear, Belkin, Buffalo and D-Link and the industry’s first 5G Wi-Fi router from Asus.
The introduction of the new chip will extend the 802.11 ac Wi-Fi technology to smartphones and tablets next year. Broadcom expects to facilitate higher speed in file transfers and video streaming from phones to PCs, TVs and gaming devices.
Samsung’s Acquisition Of CSR’s Handset Technology Poses A Threat To Broadcom
Earlier last month, Samsung agreed to pay $310 million for CSR’s mobile phone connectivity and location technology. With the acquisition, Samsung has strengthened its smartphone platform by extending silicon capabilities in Wi-Fi and GPS and has enhanced its patent portfolio.
The acquisition could turn out to be a major blow to Broadcom, which is a large supplier of chips to Samsung. The company claims not be threatened by the acquisition in the short to medium term. However, it could become a potential threat in the long run if Samsumg is able to successfully use the CSR business to compete with Broadcom.
According to Strategy Analytics, with a 72% share, Samsung tops the mobile application processor market in terms of revenue followed by Texas Instruments (12%) and Qualcomm (9%). 
A drop in Broadcom’s share in the wireless communication market by the end of our forecast period could lead to a marginal downside to our current price estimate of $45.99.Notes:
- Broadcom Plans Fast 802.11 ac Wi-Fi For Phones Early Next Year, PC World, July 25, 2012 [↩]
- Samsung buys chipmaker CSR’s handset technology, Financial Mirror, July 17, 2012 [↩]