3 Things to Watch With Broadcom

Broadcom (Nasdaq: BRCM  ) designs and develops semiconductor solutions for wired and wireless communications that deliver voice, video, data, and multimedia connectivity in homes, offices, and via mobile devices.

Today, let's look at three things investors should be watching regarding Broadcom, as they will provide us better insight into the company.

1. Design wins and innovation
With more than a handful of companies competing for the same slice of pie, it's important that Broadcom differentiate itself from its competition through innovative designs and that it land big contracts to support revenue expansion. Thus far, Broadcom has done well on both fronts.

Broadcom has continued to expand its role with Apple (Nasdaq: AAPL  ) in the iPhone 3 and 4 series and now provides the WiFi and Bluetooth connectivity chip in the iPhone 4S, with many predicting it will hold or gain in licenses for the next-gen iPhone and iPad. In addition, Broadcom has connectivity contracts with Samsung and currently supplies about a third of all connectivity chips found in Samsung phones. Samsung did recently purchase CSR's handset connectivity operations, which made Broadcom shareholders uneasy. However, the amount of time it would take to evaluate and enact a switch away from Broadcom's chips makes it extremely unlikely that this will happen.

There are also rumblings from Lazard Capital that Broadcom may find its way into the next Kindle Fire from Amazon.com (Nasdaq: AMZN  ) and replace the current connectivity chip producer Texas Instruments (NYSE: TXN  ) . Broadcom has been steadily establishing itself as the premier connectivity chip producer of tablets, and a win here would further engrain that title.

2. Macroeconomic events and product cycles
We all need to eat, sleep, and drink water, but that doesn't mean we all need to be buying smartphones and tablets. What this means for Broadcom is that its revenue stream is tied to the overall health of the economy and the up-and-downs of the tech cycle more so than your average stock.

Last week, the Fool's Austin Smith noted that consumer spending rose by an unimpressive 1.5% during the second quarter, more or less matching the rate of inflation. With wage growth trailing inflation growth for much of the past two years, consumers may opt to holster their disposable income if unemployment rates continue to rise, or if GDP growth keeps weakening. That would definitely put a crimp into Broadcom's growth plans.

In addition, tech cycles will play a huge role in Broadcom's growth. In Apple's latest quarter, we witnessed a sequential collapse in iPhone 4S sales, from 35 million to just (yeah, "just") 26 million as consumers await the introduction of the iPhone 5 within the next few months. These product cycles can be a boon for Broadcom shareholders, but consumers' wait-and-see approach can also push large orders back and hurt profitability.

One such problem is Microsoft's (Nasdaq: MSFT  ) new version of Windows, known as Windows 8, which is due out in late October. The new operating system may cause consumers to wait to buy new notebooks and tablets, which could delay big orders to the fourth quarter. Also, let's not forget that Microsoft doesn't have a pristine history of delivering new software in a timely manner. Can you say Windows Vista? Any hiccups here could spell bad news for Broadcom.

3. Acquisitions
Finally, if you can't beat 'em, buy 'em! In addition to paying out a 1.2% yield, Broadcom's strong cash flow has allowed it to go on a buying spree in recent years, and investors are waiting to see if these acquisitions will lead to genuine growth.

In September 2011, Broadcom made its largest purchase ever by acquiring NetLogic Microsystems for $3.7 billion, a 57% premium. The move was made to actually diversify Broadcom's operations away from connectivity and toward the smaller infrastructure side of its business. NetLogic provides chips that detect data packages across the Internet, determine their route, and provide security for that data. Rather than invest the time and energy required to make its own chips, Broadcom ponied up a lot of money for this purchase, so its success is paramount to future networking growth. It's also worth noting that the acquisition added 700 valuable patents to Broadcom's portfolio.

Broadcom also spent $313 million in acquiring Provigent in April 2011, which was anticipated to be earnings-neutral last year. With some time under its belt and the acquisition closed, investors would like to see positive results stemming from this connectivity producer.

Foolish roundup
Now that you know what to watch for, it should be easier to analyze Broadcom's successes and pitfalls in the future and hopefully give you a competitive investing edge.

If you're still craving even more info on Broadcom, I would recommend adding the stock to your free and personalized watchlist so you can keep up on all of the latest news with the company.

Also, don't miss our latest premium research report on Apple from none other than our senior technology analyst Eric Bleeker. This report costs less than a week's worth of coffee, and with it, you'll get the most up-to-date research on Apple for one full year. Click here to gain access to this report.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Apple, Amazon.com, and Microsoft. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, and Microsoft, as well as creating a bull call spread position in both Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always connected to you!


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