Broadcom (NASDAQ:BRCM), a leading semiconductor provider for wired and wireless communications, will announce its Q1 2014 earnings on April 24. The company’s growth has slowed over the last few quarters as it faces intense competition in the connectivity domain and invests to build its baseband portfolio. Broadcom announced a mixed set of Q4 2013 results on January 30, as revenues exceeded the high-end of its guidance but gross margins fell due to increased price competition in the 3G chipset market and higher-than-expected levels of excess and obsolete inventory. Total inventory was relatively flat year on year. Top-line growth in the quarter was mainly driven by better-than-expected infrastructure and data center sales, as Broadcom continued to face pressure in its home broadband and mobile connectivity divisions.
Broadcom believes its growth will accelerate in 2014, backed by the LTE certification of its mobile devices, continued strength in the data center, as well as rising 5G Wi-Fi and other multiple technology transitions. Our price estimate of $38 for Broadcom is at a significant premium to the current market price of $30, and we continue to believe in the company’s long-term growth potential.
We will update our valuation after the Q1 2014 earnings release.
Broadcom To Retain Its Leadership In Connectivity Solutions
With a 33% market share, Broadcom has been the leader in connectivity solutions for many years. Last year, it lost a number of low cost smartphone sockets to Qualcomm (NASDAQ:QCOM), including the HTC One Mini, Samsung Galaxy S IV Mini, and the Motorola X, which had raised doubts about its capability to retain share in the wireless connectivity market. However, Broadcom claims that its connectivity market share remains stable, as it has won designs from new customers that offset the loss of a few handsets.
We expect Broadcom to retain its market leadership in the coming years as newer technologies such as 5G Wi-Fi and 2×2 MIMO gain wider adoption. Earlier this month, Broadcom announced that it is developing new chips that could double the speed of WiFi. Broadcom’s 5G WiFi XStream chip platform will include the industry’s first six-stream 802.11ac multiple-input, multiple-output (MIMO) offering. The new platform is designed to double the performance of current WiFi devices for high-definition streaming and data, and has twice the bandwidth of existing 802.11ac routers and gateways. The platform is currently in the sampling stage and will hit production later in Q2 2014.
In addition to its strength in connectivity technologies – 5G Wi-Fi and NFC (Near Field Communications) – Broadcom is investing in emerging growth opportunities in nascent market for Internet of Things (IoT) and wearable devices. We believe it will continue to retain its market share in connectivity solutions over our forecast period.
LTE Certification To Expand Presence In The Baseband Market
Broadcom does not have a very large customer base for its 3G business and accounts for only 3% of the mobile baseband and application processor market. The company announced its first LTE-compatible baseband chip in 2013. The delay in the production of the 4G LTE chip was one of the main reasons for the significant decline in Broadcom’s stock price between July and August 2013.
The delay in launching 4G LTE chipsets also left Broadcom more vulnerable to the increased pricing pressure that the low-end 3G market is facing currently. Broadcom is looking to offset the impact by foraying into 4G LTE chipsets, which should help it secure some high-end wins. Currently, the company ships mostly 3G chipsets, where it is seeing some tough price competition and sharp margin declines.
Broadcom recently closed the acquisition of LTE-related assets of Renesas Electronics, which has given it access to a dual-core LTE SoC that is ready for volume production and is carrier-validated by leading global operators in North America, Japan and Europe. Broadcom expects its LTE-chipset business to be small in Q1 2014, but ramp significantly towards the back half of the year. We expect Broadcom’s increasing focus on China and the country’s transition to 4G LTE to play a key role in it gaining a more significant share of the cellular baseband market in the coming years.
Strong Growth In Data Center and LTE Infrastructure
On account of reduced data center and enterprise spending, as well as lower service provider capital expenditures, Broadcom marked a 10% decline in its Infrastructure and Network revenue in 2012. However, the company witnessed continuous growth in the segment in 2013, with Q4 marking the high point for infrastructure sales. Data center remains a strong growth driver for the company, with Broadcom’s leadership in high density Ethernet switches a key driver. It saw its data center business in Q4 increase 50% over the same period last year, and the full-year growth was about 25%. Its next-generation Trident II is now in volume production and Broadcom expects the same to contribute to its growth momentum in networking through 2014.
On the service provider side as well, we expect the company to benefit from the ongoing transition to 4G LTE in China, where it has secured wins for switches, processors, the back haul and other technologies. Currently, only China Mobile is aggressively building out its TD-LTE network, but we expect the other carriers to join the fray soon as FDD-LTE licenses are rolled out in the coming years.