Key Factors That Will Drive Broadcom’s Future Growth

by Trefis Team
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Broadcom’s (NASDAQ:BRCM) stock price has increased by approximately 30% in the last two years. Since the start of 2013, our valuation for the company remained close to $44, and is now in line with the current market price.

Broadcom delivered record revenues and reportable segment profitability in 2014, with combined broadband-connectivity and infrastructure revenue and profit growing 6% and 25%, respectively, compared to 2013. Broadcom announced its decision to exit the cellular baseband business in Q2 2014 on account of intense competition in the market, allowing it to eliminate the ongoing losses from the business and shift its focus to its core strengths in other segments. The move helped Broadcom increase its net income from $424 million in 2013 to $652 million in 2014 (54% growth), even though its revenue base remained relatively flat during the same period.

In this article, we briefly disucss key factors that will drive Broadcom’s growth in its key business segments, namely connectivity solutions, infrastructure and networking, and broadband solutions.

See Our Complete Analysis for Broadcom Here

Focus On Adjacent Markets To Spur Growth In Connectivity

While Broadcom has expected that its exit from the baseband business would negatively impact the low-end of its connectivity business, it remains confident of retaining its strength in the high-end. Broadcom is the No.1 player in connectivity with most of the high end smartphones using its connectivity solutions. The company does not foresee any change going forward.

New phone launches, as well as increasing penetration of 802.11ac and 2X2 solutions, are driving demand for Broadcom’s connectivity business. Broadcom launched the second generation of its 2×2 MIMO 802.11ac combo chip, which improves its industry leading performance for high end smartphones and tablet by offering faster speeds, lower power consumption, less interference and and a  smaller footprint compared to its competitors. The 2×2 MIMO 802.11ac combo chip is currently shipping in volume production. Broadcom also launched the industry’s first GPS Sensor Hub combo chip, which significantly reduces power consumption in smartphones and tablets while enabling always-on health fitness and life logging applications. The company is also ramping its newly launched LTE and TDS CDMA Solution while maintaining its market leading position in 3G.

In addition to smartphones and tablets, Broadcom sees new growth potential in emerging markets, including the Internet-of-Things (IoT), automotive electronics, wearable devices and small cell technology. The company continues to drive leading-edge features so as to maintain its strength in high end smartphones and tablets.  And it is strengthening and diversifying its portfolio with new low power connectivity solutions for the Internet of Things and the support of iBeacon and HomeKit.

In the IoT market, Broadcom claims that the design activity remains high with its current products. It is in the process of refreshing its portfolio with purposeful products that are optimized specifically for different market segments. The registrations for Broadcom’s WICED IoT platform has grown significantly, from 2,000 at the beginning of 2014 to over 8,000 at present. The company has announced the expansion of its distribution channel with over 40 new partners to expand its sales reach to IoT customers.

Broadband Business To Be Driven By The Set-Top Market & Access Business

Broadcom continues to see solid trends in access products as operators deploy the latest technologies including VDSL upgrades to power faster connections in the home. In 2014, the company gained share in VDSL, enjoyed increased operator spending and saw a richer mix of technologies such as vectoring and channel bonding. Broadband access over cooper witnessed meaningful upgrades and the company expects the next DSL standard (G.fast) to begin ramping in 2015. Broadcom also claims to be gaining share in PON (Passive Optical Network) devices and sees new product cycles coming in Broadband Access.

Growth in emerging markets and new technologies are driving growth in Broadcom’s set-top box business. Operators such as Dish in North America, Free in France and Tata in India, have begun to offer ultra HD set-top boxes to their subscribers. Broadcom expects around 15 operators across multiple regions to launch 4K television service in 2015. Expanding the geographic footprint is an important factor driving growth in Broadcom’s set-top business. The company’s expansion in new territories, including South America, South Asia, and Africa, benefited it in 2014 and it expects the trend to continue this year as well.

Additionally, Broadcom expects to benefit from the transition to 4K HEVC over the next three to four years. In cable modems, people are switching over to DOCSIS 3.1. Though Broadcom expects to see initial shipments this year, it expects higher adoption of the technology to commence next year onwards.

Long-Term Growth In The Infrastructure Business Remains Intact

2014 was the third consecutive year of double-digit growth for Broadcom’s infrastructure business, with growth mainly being driven by its leadership in the switch market. Though Broadcom admits that the infrastructure business remains lumpy in the short-term, the company believes it will benefit from new product launches and capabilities rolling out in the near future.

In the data center market, Broadcom has a large number of customers in production with Trident II and is building a solid pipeline of design wins for Tomahawk. At 3.2 terabits per second, Tomahawk is the industry’s highest bandwidth switching solution and has been shipped to over 15 different networking box makers, establishing an early lead over competitors. In the service provider market, the company is seeing broad adoption of its 28-nanometer heterogeneous knowledge-based processers.

Long-term growth drivers for Broadcom’s infrastructure business include: 1) new build-outs and expansions of data centers; 2)  increasing data traffic at faster speeds; 3)  ASIC conversions to merchant solutions; and, 4) overall enterprise network upgrades as people move to higher speeds. Broadcom expects double-digit growth in the infrastructure business for the next few years.


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