Difficult Times Lie Ahead for Broadcom

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Chipmaker Broadcom (UNKNOWN: BRCM.DL  ) has fallen off a cliff in the past six months. Shares have declined close to 25% as its guidance has failed to inspire confidence among investors on the last two occasions. This seems surprising for a company that's deeply embedded into the mobile computing revolution and supplies chips to almost half of the world's smartphones and tablets..

But this also means that Broadcom has much to lose as well, as competitors invade its turf and churn out more technologically advanced products. Broadcom's recently released third-quarter report did its bit to magnify such fears. Management said that it expects its mobile and wireless revenue to drop going into the December quarter -- surprising for a company that should ideally be expected to sell more mobile chips going into the holiday season.

Losing steam
With 47% of Broadcom's revenue coming from the mobile and wireless segment, weakness in this area is not welcome. Being a supplier to both Apple (NASDAQ: AAPL  ) and Samsung, one would have expected that Broadcom would benefit from higher device sales in the holiday period.

However, over the previous conference call, Broadcom management stated that the weakness in mobile is down to the fact that a major smartphone customer (read as Apple) used the 802.11n Wi-Fi standard. Broadcom has been focusing on 5G Wi-Fi technology but Apple stuck to the old standard, leading to probably the same content in the iPhone as last time. Moreover, the latest iPads stuck to the same Wi-Fi standard. 

Broadcom supplied the connectivity combo chips to Apple for the iPhone this time as well, along with the touchscreen controller. However, the fact that Apple didn't progress to a more updated Wi-Fi standard seems to have hurt Broadcom. Since it is expected that Apple will account for at least a tenth of Broadcom's sales this year, this particular choice on Apple's part as to the Wi-Fi standard could have a short-term impact on the company's prospects. 

And that's what Broadcom expects -- a short-term impact. The company believes that its customers remain firmly committed to transition to 5G Wi-Fi going forward and help Broadcom's growth. In addition, Broadcom management claims that its 802.11ac solution (5G Wi-Fi) is twice as fast when compared to rivals.

A big challenge
Broadcom is also looking to shore up its 4G LTE solutions and it acquired Renesas Electronics for this reason. Broadcom is late to the 4G modem party and the acquisition of Renesas could be thought of as a desperate move by the company as it looks to challenge Qualcomm (NASDAQ: QCOM  ) in this market. Qualcomm commands 63% of the cellular baseband market, according to Strategy Analytics, while Broadcom's is still in the single digits. 

Now, to have any meaningful impact on the top line, Broadcom will have to land some high-volume customers for its LTE solutions, an area where it lags MediaTek and Intel also. However, this market would be a tough nut to crack, as Qualcomm has a vice-like grip over it. Qualcomm supplied to the LTE modem, the transceiver, and the power management module to the latest iPhone 5s. 

Qualcomm, like Broadcom, is a key supplier to Samsung as well. Qualcomm had supplied a bunch of chips to the Samsung Galaxy S4, ranging from the processor to the audio codec, apart from the LTE modem. In comparison, Broadcom had supplied an updated version of the Wi-Fi combo chip, the GPS receiver, and the NFC chip for the S4. This seems like an impressive collection, but the fact that the S4 is losing its crown to the latest Apple flagship isn't good news.

Apple's iPhone 5s was the top-selling device in the U.S. in September, as reported in The Guardian. Apple was able to sell 4.8 million phones in September itself, despite the device being on sale for just 10 days. Apple increased its smartphone share to 38% in the U.S. and as the holiday season nears, Apple could increase its lead.

Samsung was already reportedly cutting down production of the Galaxy S4 and this had already weakened Broadcom. However, things might get worse going forward. A teardown of the Galaxy S4 Mini by Chipworks revealed that Qualcomm had won the combo chip spot from Broadcom. Hence, if Samsung decides to switch to Qualcomm for its next flagship, Broadcom would be facing more difficulties.

The bottom line
It looks like Broadcom is having difficulty growing its business. Revenue growth in the previous quarter was a mere 0.80% from the year-ago period while non-GAAP net income declined just over 3% as well. Given the challenges ahead and near-term uncertainty around the adoption of its products, it would make sense to wait and watch from the sidelines as to how Broadcom fares.

Let your smartphone pay you
The mobile revolution is still in its infancy, but with so many different companies it can be daunting to know how to profit in the space. Fortunately, The Motley Fool has released a free report on mobile named "The Next Trillion-Dollar Revolution" that tells you how. The report describes why this seismic shift will dwarf any other technology revolution seen before it and also names the company at the forefront of the trend. You can access this report today by clicking here -- it's free.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2702350, ~/Articles/ArticleHandler.aspx, 8/25/2016 9:36:09 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 12 hours ago Sponsored by:
DOW 18,481.48 -65.82 0.00%
S&P 500 2,175.44 -11.46 0.00%
NASD 5,217.70 -42.38 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/24/2016 4:00 PM
AAPL $108.03 Down -0.82 +0.00%
Apple CAPS Rating: ****
BRCM.DL $0.00 Down +0.00 +0.00%
Broadcom CAPS Rating: ****
QCOM $62.61 Down -0.48 +0.00%
Qualcomm CAPS Rating: ****