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It seemed as though shares of Broadcom (UNKNOWN: BRCM.DL ) were finally on their way up after a not-so-great quarter. With the iPhone 5s/5c connectivity combo sockets secured, and with good news on network processing units over at ZTE, it seemed that sentiment had begun to reverse. However, a recent note from Piper Jaffray's Gus Richard claims that Broadcom's foundry partners have cut production of Broadcom's products on lower-than-expected sales of the Galaxy S4, a broader mix shift in the smartphone space to lower-end phones, and share losses to larger rival Qualcomm (NASDAQ: QCOM ) . Is it time for investors to panic?
Bad news equals buying opportunity
Tech investors have it a little bit different than investors in most other fields. In addition to the traditional financial performance metrics, a good portion of a stock's near-term performance is correlated to news flow. So, if a company is announcing blowout quarters, visibly gaining share, and seeing robust growth, then investors will be willing to pay much more for a company's earnings than, say, a company that is missing estimates, guiding poorly, or taking writedowns on gigantic acquisitions.
However, the good news is that for long-term investors in high-quality companies, bad news presents a very compelling buying opportunity, particularly if investors have a sense of the good news that could be just around the corner. In fact, across each of its segments, Broadcom is on the cusp of reversing the news flow, expanding its total addressable market, and gaining share.
The LTE opportunity is ripe for the taking
While the bread and butter of its mobile and wireless business today lies in the firm's connectivity combo chips (Wi-Fi, NFC, Bluetooth, etc.), the company's ambitions to control more of the platform -- which means more money per unit shipped -- have led it to invest heavily in developing cellular modem and RF technology. LTE, the latest cellular standard, has proven quite a challenge for every company whose name isn't Qualcomm, and Broadcom's recent acquisition of Renesas Mobile's LTE assets for $164 million is a testament to this.
The good news is that with Renesas Mobile, Broadcom bought itself a fully functional, carrier-validated system-on-chip platform with a built-in LTE baseband that it will be able to ship for revenue in the early part of 2014. While this initial revenue uplift will likely be encouraging to investors, the more exciting thing is that from a longer-term perspective, Broadcom will likely emerge as a potent competitor in the cellular connectivity space. While dethroning Qualcomm may prove difficult, and while Intel's (NASDAQ: INTC ) ambitions to play hardball in cellular are quite clear, the market for LTE is quite large -- and growing -- meaning that Broadcom will very likely see a steep incline in its revenue if its products are even remotely competitive.
What about everything else?
While the incremental LTE opportunity is certainly a positive that will likely be realized over the next couple of months, it is important to understand the negatives that Piper's analyst mentioned. The secular mix shift to cheaper handsets is likely real, and Galaxy S4 orders are probably sluggish. As far as share losses are concerned, Broadcom's management was adamant on the last call that its share would be stable throughout the year, so it's not clear if that particular fear is simply an extrapolation from a few lost sockets (such as the Galaxy S4 Mini) or if there is more depth to that call.
The Galaxy S4 weakness seems bad, but the real question is whether the high-end market is on the decline, or if it's just growing more slowly. If the latter is the case, and given the strong sales of the iPhone 5s/5c (Broadcom has the Wi-Fi and touch-controller sockets in both phones), then a share shift toward Apple should still be favorable for Broadcom. If the high end is in outright secular decline, and if the company doesn't want to be more aggressive in chasing those lower-end sockets, then that could be an issue.
The Foolish bottom line
The piece of news from Piper is certainly not positive, and as a result, the shares are now trading back near 52-week lows. However, this looks like a buying opportunity. Broadcom's products are best-in-class, it's still exposed to a number of solid markets, and the LTE growth opportunity is just around the corner. While news flow will continue to be difficult over the next couple of months, the shares still look compelling for those with a longer time horizon.
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