Broadcom’s Earnings Can Dial Up $51 On Mobile Outlook

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Broadcom (NASDAQ:BRCM), a global leader in semiconductors for wired and wireless communication, will announce its Q1 2012 result on Tuesday, May 1st. It competes with other North American semiconductor companies like Qualcomm (NASDAQ:QCOM), Nvidia (NASDAQ:NVDA), Texas Instruments (NASDAQ:TXN) and Marvell Technologies (NASDAQ:MRVL), as well as certain European semiconductor manufacturers like STMicroelectronics and Renesas electronics.

Texas Instruments’ exit from the baseband market, the acquisition of Atheros by Qualcomm, the exponential growth in smartphones and tablets, network expansion and upgrades fueled by growth in data traffic and cloud computing are some of the factors that will impact the performance of Broadcom in Q1 2012, as well as determine the outlook for the year ahead.

Texas Instrument’s Baseband Exit to Benefit Broadcom

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Texas Instruments, which posted its Q1 2012 results on 23rd April, saw a decline in revenues from its broadband division as it enters the final phase of exiting the business. It plans to completely exit the baseband business by end of this year.  With TI’s exit there is a gap to be filled in this market, which Broadcom can leverage.

It already supplies baseband for Nokia and Samsung, two of TI’s biggest baseband customers. If the products perform as expected, Broadcom might be the preferred supplier of baseband products to both the manufacturers. The switching cost in the cellular industry for changing to a different baseband supplier is extremely high and thus companies prefer to have a long term contract with its suppliers. We believe that Broadcomm will see an almost 2% jump in its market share this year.

Increased Competition from Qualcomm post Atheros Acquisition

Qualcomm is the market leader in the mobile baseband market, but Broadcom with an almost 35% share dominates the wireless connectivity market, and is well ahead of competitors like Texas Instruments and Qualcomm.

However, with the acquisition of Atheros by Qualcomm in 2011, Broadcomm could face increased competition in the coming years. With the added advantage of Athero’s Wi-Fi capabilities along with 3G and 4G connectivity in its portfolio, Qualcomm has an opportunity to sell its chips into all tablets, whether they are 3G, 4G or Wi-Fi/Bluetooth. Qualcomm’s market share in the wireless connectivity market has seen a substantial increase in the last two years, from 28% in 2009 to the current level of 35%. With the broadest product lineup combined with the added advantage of delivering connectivity solutions at all price points, Broadcomm commands leadership in providing integrated SoC solutions. Keeping in mind the plausible threat from Qualcomm, we believe the market share of Broadcomm in the wireless segment will stabilize in the years ahead.

Wireless connectivity and baseband applications market combined, contribute a little over 50% to Broadcomm’s price estimate. Thus, how the company fairs in these two markets will have a significant impact on its valuation.

Broadcomm is the undisputed leader in the fast growing mobile and tablet market, with its chips being currently used in Apple iPad, Samsung Tab and Motorola Zoom amongst many others. We feel that superior R&D and leading integration capabilities will put it ahead of the competition, as it continues to benefit from the powerful trends in the communication market.

We have a current price estimate of $51.60 for Broadcomm, a premium of over 40% to the current market price.

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