Earlier this week, Broadcom (NASDAQ:BRCM) introduced its new 3G smartphone platform, which offers strong performance capabilities at faster data speed, for the Android 4.2 Jelly Bean operating system. The platform integrates Broadcom’s connectivity solutions (WiFi, Bluetooth, GPS etc) and feature the industry’s first dual-core HSPA (high speed packet access) processor for affordable smartphones. While the platform is currently in the sampling stage, the company claims that it would be in volume production by the end of this month.
The Turnkey platform simplifies the manufacturing process by offering a ready-made platform for processors, hardware components as well as software applications. This in turn helps the handset manufacturers to market their products faster and at a lower cost. While the low-cost handset market is increasing at a rapid pace, users are demanding a better mobile experience over time. We believe that Broadcom by leveraging its technology can play an important role in delivering low-cost affordable smartphones.
Historically, Broadcom has lagged behind in the baseband and application processor market. However, the company has registered a marginal increase in its market share over the years. 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. Its 3G baseband shipments marked an over 600% y-o-y growth in the first half of 2012. 
Though Qualcomm (NASDAQ:QCOM) 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.
Broadcom’s Focus On Low-Cost Smartphones Could Increase Its Market Share
The Android OS accounts for around 75% share of the global smartphone market.  Android also account for a majority share of the low-cost smartphone market which is expanding at a rapid pace, primarily fueled by growing demand from emerging economies. Earlier this year, Broadcom’s chief executive, Scott McGregor, declared the company’s intention to work toward building a relationship with low cost Chinese smartphone makers. The company aims to gain share in other emerging markets as well where the demand for low-cost handsets is on the rise.
Stand-alone processors accounted for 44% of smartphone apps processors in Q1 2012, up from 39% in Q1 2011.  However, baseband-integrated app processors are cheaper for handset makers to use in mobile phones compared to standalone processors. The baseband-integrated app processors strategy of companies such as Broadcom and MediaTek is their prime reason for the growing threat to Qualcomm.
Broadcom reported record earnings of $1.02 billion from its mobile and wireless division in Q3 2012. Much of the growth was driven by share gains in China as well as an improved product mix. China remains an important destination for the company. So far, Broadcom has had success with many small customers as well as certain big customers in China, though it claims that the progress has been slightly slower than what it expected. However, with the aim to develop more competitive products over next year, Broadcom is confident of increasing traction in the Chinese market.
Additionally, with Texas Instruments‘ (NADAQ:TXN) recent exit from the the smartphone and tablet market, Broadcom could stand to gain additional market share. We estimate Broadcom’s share in the baseband and application processor market to increase to around 5%, by the end of our forecast period.
Our price estimate of $44.95 for Broadcom is at a premium of around 40% to the current market price.Notes:
- Qualcomm, MediaTek and Intel Together Held Three-Fourths of Cellular Baseband Revenue Share in 1H 2012, Strategy Analytics Press Release, October 31, 2012 [↩]
- Android Marks Fourth Anniversary Since Launch With 75% Market Share in Third Quarter, IDC Press Release, November 1, 2012 [↩]
- Strategy Analytics: Smartphone Applications Processor Revenue Soared 55 Percent in Q1 2012, Market Watch, August 7, 2012 [↩]