Broadcom Corporation (NASDAQ:BRCM) is undervalued given its solid core business and the optionality in Mobile. The company's platform-driven approach in Broadband/Networking and its initial LTE traction puts the semiconductor firm in good shape for 2014.
The company continues to target growth in excess of its peers by leveraging its leading position with tier-1 customers and complete platform solutions in its Broadband and Networking Infrastructure segment.
Broadcom's strategy in Wireless is to apply its platform-driven approach to the Connectivity and Baseband end-markets. The company believes this enable higher Broadcom content per box and offer integrated turn-key solutions to a broader set of customers, including tier-2/3 OEMs in emerging countries.
[Related -Is Intel (INTC) About To Buy One Of These Companies?]
Deutsche Bank analyst Ross Seymore believes this approach is necessary for scale reasons as well as to defend/strengthen the company's leading Connectivity share by allowing it to compete on complete platform solutions.
On the LTE front, the company believes its early launch of 5G WiFi (802.11ac) enabled 75 percent attach rates in LTE phones, as tier-1 OEM's that demand superior performance (2x throughput), power efficiency (35 percent lower), die size (35 percent smaller) and bill of materials cost (25 percent lower) chose Broadcom over competing solutions.
Broadcom's view is that the combo chip and baseband should remain on separate silicon as the technology cadence for these devices are inherently different.
[Related -Is This The Start Of A Correction?]
At the lower-end of the smartphone market, the company believes it must adopt a platform-driven approach to offer bundled solutions to drive Connectivity share and increase BRCM content per phone ($18-20 bundled vs. $10-12 3G baseband only). The company believes it can achieve attractive margins on the bundled platform, offsetting much lower profitability in standalone basebands.
In! basebands, Broadcom pulled its LTE roadmap ahead by one quarter, which effectively brings forward the ramp of the company's first LTE design win (dual core, Samsung) into early first quarter 2014.
Seymore believes this pull-in of the LTE roadmap was entirely driven by the Renesas acquisition and that most, if not all of Broadcom's current and future LTE baseband products will be based on Renesas acquired technology.
The company's quad-core LTE system on chip (SoC) was also pulled ahead to sample in the first half of 2014, earlier than the original mid-2014 timeframe, and perhaps most importantly, the company's CAT-6 FDD/TDD LTE-A thin modem is now scheduled to sample in mid-2014 versus second half of 2014 previously.
Seymore believes this accelerated timeline is a positive step, and continue to believe 2014 will be a make-or-break year as the economic model will require the company gain significant scale to drive profitability. Also, 2014 could be the year when Broadcom will either succeed or decide to exit the baseband business.
This needed scale can only be achieved in the near term if its CAT 6 FDD/TDD LTE-A thin modem is designed into a high volume "hero-phone" in 2H 2014 that ramps in the first half of 2015; such a design-win as a necessary prerequisite for Broadcom to remain in the baseband market beyond 2014.
Seymore said the company has a meaningful Connectivity opportunity related to the "Internet of Things." The consumer devices targeting these applications (wearables, health monitoring, etc) do not require baseband capability and, therefore, Broadcom is well positioned to win share.
Broadcom has delivered double digit growth over the past 3-4 years and materially outperformed the peer group in 2013. Networking revenues come from the following end-customers: service providers, data centers and enterprise, with the strongest growth from data center driven by web 2.0 capex.
Despite low-single digit service provider capex growth, Broadcom believes it is ! exposed t! o the fastest growing areas (carrier Ethernet, IP routers, 3G/4G wireless, packet optical) in the carrier market.
In new growth areas, Broadcom sees multi-core processing as significant growth opportunity with potential $3 billion served available market (SAM) in many applications including networking, storage and wireless infrastructure.
Wireless infrastructure (backhaul, radio heads, processors) is another growth area with potential SAM of $1 billion and Automotive Ethernet was also highlighted as a growth opportunity ($1 billion SAM) with this year's BMW X5 featuring Broadcom solutions for adaptive driving.
Broadcom recently raised its fourth quarter revenue outlook to $2 billion - $2.5 billion (Street expects $1.99 billion) from $1.975 billion, citing incremental strength across all segments, with slightly more upside in Networking. Fourth quarter gross margin guidance was raised to down 50-75bps from down 50-100bps due to favorable product mix.
Broadcom shares trade about 11.8 times its forward earnings. This multiple is a discount to the large-cap peer average of 14 times. They are down 17 percent this year and traded between $23.25 and $37.85 during the past 52-weeks.
No comments:
Post a Comment