Why Broadcom Is Cheap And Will Gain Market Share From The Smartphone Boom

by Trefis Team
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Trefis
BRCM
Broadcom
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Quick Take

  • Broadcom’s share in the baseband and application processor market has increased from 3.2% in 2009 to 3.9% in 2012 as it made continuous improvement in its product portfolio.
  • While the baseband and application processors market has risen at a CAGR of 28% between 2009 -2012, Broadcom’s revenue from the segment has increased at a CAGR of 36% during the same period.
  • On account of rising mobile shipments, the baseband and application processor market is estimated to rise at a CAGR of 10% through 2019.
  • With significant improvements and the addition to its mobile product portfolio last year, we forecast Broadcom’s revenue from the segment to grow at a CAGR of 14%.
  • LTE capability, success in the low-end Android smartphones, building relationship with low cost smartphone makers in China and extra headroom in the mobile market with Texas Instruments’ exit provide added opportunity for Broadcom to increase its market share.

While Broadcom (NASDAQ:BRCM) remains the leader in the mobile wireless market, it accounts for only 3.9% of the baseband and application processors market. It provides baseband solutions for EDGE, 3G and 4G systems as well as multimedia and application processors for mobile phones and handheld devices. With a continuous improvement in its product portfolio, Broadcom’s share in the baseband and application processor market has slightly increased in the last few years.

Historically, while the baseband and application processors market has risen at a CAGR of 28% between 2009 -2012, Broadcom’s revenue from the segment has increased at a CAGR of 36% during the same period. With growing adoption of smartphones and tablets across the globe, the baseband and application processors market is expected to continue rising for years to come, albeit at a slower rate. Aiming to increase its competitiveness in the market, Broadcom has been focusing on innovating its mobile product portfolio. Significant product improvements made last year lead us to believe that the company will manage to outpace growth in the overall market in the future as well.

The baseband & application processors segments along with the wireless division account for approximately 50% of Broadcom’s portfolio. Thus, retaining its competitiveness in the mobile market is important for its business. We estimate Broadcom’s market share in the baseband and application processors market to slightly increase this year and stabilize thereon for the rest of our review period. In this article, we justify our rationale behind our forecast.

See Our Complete Analysis for Broadcom Here


Higher Mobile Shipments To Drive Growth In the Baseband & Application Processor Market

The mobile baseband and application processor market represents revenue from the sale of cellular baseband and mobile processors for mobile devices. The market has grown at a CAGR of 28% between 2009-2012, to reach $28.4 billion in 2012. The rapidly rising smartphone and tablet shipments is the primary reason for this growth.

Despite macro headwinds, the mobile device market continues to grow at a quick pace and is the fastest growing segment in the semiconductor industry. Based on our belief that smartphone and tablet shipments will continue to drive growth in the future, we estimate the baseband and application processor market to grow at a CAGR of 10% through 2019.

Some data supporting our views are:

- Smartphone shipments increased by 43% in 2012 ($675 million), accounting for 39% of the mobile phone market. [1] Gartner forecast the mobile phone shipments to climb to 2.2 billion units by 2016, and we estimate smartphones to account for 60% of the shipments.

- IDC estimates the global tablet shipments to have reached 117 million units in 2012, a 65% increase from 2011, and forecast the market to rise to over 260 million units by 2016. [2]

Broadcom’s Baseband & Application Processor Business To Increase At A CAGR Of 14%

Broadcom’s revenue from the baseband and application processor market grew at a CAGR of 36%, increasing its market share from 3.2% in 2009 to 3.9% in 2012, as per our estimate. With a continuous improvement in product mix, the company now ranks number four in the baseband and smartphone application processor market. [3] [4]

With significant improvement and the addition to its mobile product portfolio last year, we think that Broadcom can manage to outpace growth in the baseband and application processor market in the future as well. We forecast its revenue to increase at a CAGR of 14% as compared to a 10% CAGR for the overall market, through 2019.

1. LTE Capability to increase competitiveness: Earlier this year, Broadcom announced its first LTE-compatible baseband chip (BCM21892) that it claims to be 35% smaller compared to current products making it the industry’s smallest 4G LTE chip in the market. The smaller chip size not only makes it cheaper to produce but also more power-efficient. Broadcom customers are currently testing the LTE modem and production is expected to begin in 2014.

4G/LTE is the future of wireless connectivity for mobile devices, especially smartphones, and its dominance in the production of LTE chips has enabled Qualcomm (NASDAQ:QCOM) to lead the smartphone market so far. Of the various technologies that are driving the market currently, LTE is seeing the strongest growth as carriers around the world increasingly shift to the new standard for wireless communication.

Though increasing competition in the space from Qualcomm, Intel (NASDAQ:INTC), and Nvidia (NASDAQ:NVDA) remains a big threat, we believe that by making its portfolio more competitive, the LTE compatibility will help Broadcom further expand its penetration in the baseband market.

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2. Focus on low-cost smartphones : Though Qualcomm 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. The Android OS accounts for around 75% share of the global smartphone market. [5] Android also accounts for a majority share of the low-cost smartphone market that is expanding at a rapid pace, primarily fueled by growing demand from emerging economies.

Targeting the rapidly growing smartphone sales in China, Broadcom has been focusing on building a relationship with low cost smartphone makers in the region. It is working towards developing new chips that would be compatible with China Mobile’s phones as the current chips produced by the company are only compatible with China Unicom phones.

Low-end smartphones are rising at a rapid pace in emerging markets such as China where 3G penetration is as low as 17%. We believe that Broadcom’s focus on the rapidly growing low-cost smartphone market in emerging countries could further pull up its market share in smartphone application processors.

Broadcom’s growing success in the low-end Android smartphone segment has increased its competitiveness in the market. 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 the prime reason for the growing threat to Qualcomm.

3. Texas Instruments’ baseband exit could benefit Broadcom: Texas Instruments’ decision to exit its baseband business last year leaves a gap to be filled in the market. Broadcom already supplies to Nokia and Samsung, two of TI’s biggest baseband customers. With a rapidly evolving product portfolio, Broadcom might gain additional design wins, consequently increase its market share in the future.

Valuation Impact

If Broadcom continues launching new innovative products that outpace competition, its market share could continue rising during our review period. If its market share reaches 8%, there could be a marginal upside (~5%) to our price estimate.

On the contrary, on account of intense competition in the market, Broadcom’s market share could decline to 2.5% which could lead to a marginal downside (~5%) in our price estimate for the company.

Our price estimate of near $44 for Broadcom, marks our valuation at a >20% premium to the current market price.

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Notes:
  1. Gartner Says Worldwide Mobile Phone Sales Declined 1.7 Percent in 2012, Gartner Newsroom, February 13, 2013 []
  2. IDC Raises Its Worldwide Tablet Forecast on Continued Strong Demand and Forthcoming New Product Launches, IDC Press Release, September 19, 2012 []
  3. Qualcomm, MediaTek and Intel Together Held Three-Fourth of Cellular Baseband Revenue Share in 1H 2012, Strategy Analytics, October 31, 2012 []
  4. Qualcomm Maintains Lead in Smartphone Apps Processor Market, Cellular-News, January 11, 2013 []
  5. Android Marks Fourth Anniversary Since Launch With 75% Market Share in Third Quarter, IDC Press Release, November 1, 2012 []
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