Broadcom’s Outlook Remains Positive With A Strong Product Portfolio

by Trefis Team
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Quick Take

  • Broadcom will announce its Q2 2013 earnings on July 23. Though macro headwinds might limit its short term growth, we believe in its long term growth potential.
  • It has strong cash flows, a robust product road map for 2013 and beyond as well as accelerating design wins across business segments.
  • With rising global demand, smartphones and tablets are slated to drive growth in the semiconductor industry going forward. Though Broadcom remains the leader in the mobile wireless market, it accounts for only 3.4% of the baseband and application processors market.
  • It has expanded its product portfolio with 5G Wi-Fi smartphone chips and NFC quad-core chips. We believe that Broadcom will continue to retain its market dominance in connectivity solutions.
  • The launch of its first LTE-compatible baseband chip, design wins from Samsung, its growing success in the low-cost smartphone domain, and Texas Instruments exit from the baseband market will increase its penetration in the baseband market.
  • While Chinese demand for set-top boxes slowed down in Q1, demand from developing countries remain strong as these regions increase their digital transition.

Broadcom (NASDAQ:BRCM), a leading semiconductor provider for wired and wireless communications, will announce its Q2 2013 earnings on July 23. Despite an annual contraction in the overall semiconductor industry, Broadcom witnessed a 8% increase in revenues last year though higher operating expenses lowered its net income by 22%. Though seasonal factors led to a marginal sequential decline in its Q1 2013 revenues, we believe the company fared well as it managed to almost double its net income compared to Q1 2012.

While we agree that macro headwinds might limit Broadcom’s short term growth, we believe in its long term growth potential. The company gained additional market share in all of its business segments – connectivity & baseband, network solutions and broadband last year, which is proof of its improving competitiveness in the market. With strong cash flows, a robust product road map for 2013 and beyond, as well as accelerating design wins across business segments, we believe that Broadcom has strong fundamentals to support a higher valuation.

See Our Complete Analysis for Broadcom Here

Broadcom To Ride The Mobile Wave With A Strengthening Product Portfolio

With rising global demand, smartphones and tablets are slated to drive growth in the semiconductor industry going forward.

Here are certain estimates that support the view:

– Smartphone shipments increased by 43% in 2012 ($675 million) accounting for nearly 40% of the mobile phone market. [1] Research firm IDC reports that smartphones comprised more than half of all phones shipped globally for the first time in Q1 2013. [2] It forecasts 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. [3]

Broadcom provides baseband solutions for EDGE, 3G and 4G systems as well as multimedia and application processors for mobile phones and handheld devices. Though it remains the leader in the mobile wireless market, the company accounts for only 3.4% of the baseband and application processors market. We believe that Broadcom will continue to retain its market dominance in connectivity solutions and will gain additional share in the baseband market in the future.

In 2012, Broadcom expanded its product portfolio with 5G Wi-Fi smartphone chips and NFC quad-core chips, which targets growth in mass market mobile phones as well as high-end mobile phones and devices. It has crossed $100 million in revenue from 5G Wi-Fi products and introduced the industry’s first 5G Wi-Fi smartphones and hot hotspot router. It expects 5G penetration in mobile devices, especially high-end smartphones to significantly increase during 2013. Approximately $300 million of NFC units were shipped last year and based on its design win momentum, Broadcom anticipates a double-digit growth in its NFC portfolio by the end of 2013. [4]

With a continuous improvement in its product portfolio, Broadcom has managed to increase its market share in the last few years. Owing to significant improvement and the addition to its mobile product portfolio last year, it now ranks among the top four players in the baseband and smartphone application processor market. [5] [6]

The high profile design wins with Samsung, the launch of its first LTE-compatible baseband chip, its growing success in the low-cost smartphone domain, and Texas Instruments exit from the baseband market are factors that support our belief of Broadcom gaining more market share in the future. (Read: Broadcom Strengthens Its Baseband Portfolio With New Quad Core Chips)

Broadcom Will Gain From The Growing Set-Top Demand From Developing Countries

Broadcom saw a marginal decline in revenues from the broadband market last quarter on account of lower modem demand from China. We think this is a temporary decline as the demand for advanced set-top boxes in developing countries remain strong as these regions increase their digital transition.

Broadcom’s broadband communications business offers a wide range of solutions that enable voice, video, data and multimedia services over wired and wireless networks for the home. With 15% higher set-top box shipments, it gained additional market share and delivered strong growth and profits throughout 2012. It has been continuously innovating its product portfolio to expand its footprint in the global set-top box market.  In Q1 2013, it introduced the latest generation of set top box SOCs for entry level systems, which is a cost effective platform enabling advanced video experiences to subscribers.

We believe that high growth rates in emerging markets combined with Broadcom’s increasing penetration in Brazil, Eastern Europe and India, among others, will help drive its future growth. Additionally, though the subscriber growth in developed markets remain low, the technological growth will help drive Broadcom’s business in these markets in the future. (Read: Broadcom Can Maintain Its Leadership In The Set-Top Box Market)

We will update our price estimate of $44 for Broadcom after the Q2 2o13 earnings release.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Gartner Says Worldwide Mobile Phone Sales Declined 1.7 Percent in 2012, Gartner Newsroom, February 13, 2013 []
  2. Broadcom Introduces Quad-Core Platform with 5G WiFi, NFC, GPS and Indoor Positioning, Broadcom Press Release, June 13, 2013 []
  3. IDC Raises Its Worldwide Tablet Forecast on Continued Strong Demand and Forthcoming New Product Launches, IDC Press Release, September 19, 2012 []
  4. Broadcom’s CEO Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 23, 2013 []
  5. Qualcomm, MediaTek and Intel Together Held Three-Fourth of Cellular Baseband Revenue Share in 1H 2012, Strategy Analytics, October 31, 2012 []
  6. Qualcomm Maintains Lead in Smartphone Apps Processor Market, Cellular-News, January 11, 2013 []
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