Despite visible softness in demand from Europe and a slowdown in growth in Asian economies, Broadcom (NASDAQ:BRCM) registered an 8% sequential rise in revenues and posted net income of $160 million in Q2 2012. The share gain in various markets helped the company offset the macroeconomic headwinds impacting the semiconductor industry.
Broadcom will declare its Q3 2012 earnings on October 23, and we do not expect the results to be significantly different than the previous quarter. With additional revenue stream from NetLogic, stability in the wireless connectivity segment and introduction of new broadband platforms, we think Broadcom continues to have strong fundamentals to support a higher valuation.
Here we list certain key trends that could have a favorable impact on Broadcom’s earnings this quarter.
Additional Revenue Stream From NetLogic
With its acquisition of NetLogic Microsystems in February 2012, Broadcom expanded its addressable market 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, we believe Broadcom is better positioned to meet the growing customer demand.
The additional revenue stream from NetLogic fueled Broadcom’s revenue from the infrastructure and networking segment, which posted a strong Q2 driven by growth in switching products. We think that the growth in the company’s integrated platform approach, an increasing trend towards data center build-outs and the expanding IP portfolio after NetLogic’s acquisition could lead to another strong quarter for this division.
Growing Strengths In Wireless Connectivity
On account of growing strength in wireless connectivity and 3G basebands, the company registered higher-than-expected growth in the wireless segment in Q2 2012. With a majority share in the mobile wireless market, Broadcom is the undisputed 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.
In July this year, Broadcom 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 the leading integrated SoC capabilities and 5G Wi-Fi solutions, Broadcom has the capability to retain its foothold in the wireless market. However, Qualcomm’s (NASDAQ:QCOM) Snapdragon processor and Samsung’s (NASDAQ:SSNLF) acquisition of CSR’s handset technology continue to pose a threat to Broadcom’s dominance in this division.
Additionally, the company claims that it is witnessing the crossover 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.
Expansion In Addressable Market To Fuel Growth In Broadband Division
Fueled by growth in sales of broadband modems, which was partially offset by a decline in Blu-ray and DTV, the broadband segment registered a sequential increase of 10% in Q2 2012. With Broadlight on board, Broadcom now offers service providers a complete solution across the access spectrum from DSL and cable to PON. Additionally, Broadcom has meaningfully expanded its footprint in the service provider market by announcing powerful new products which further increases its breadth of offerings.
We have a price estimate of $45.99 for Broadcom, a premium of close to 40% to the current market price.