When the official specifications for Google's (GOOGL 1.42%) Nexus 5 became clear – that is, that it would sport Qualcomm's (QCOM 1.62%) Snapdragon 800 apps processor – it seemed almost certain that Qualcomm's integrated Wi-Fi and Bluetooth in this part would lead to Broadcom (NASDAQ: BRCM), the leading vendor of connectivity combo chips for high end phones, losing this socket to Qualcomm.
However, according to iFixit's teardown of the Nexus 5, Broadcom won the connectivity combo slot. Further, unlike the disappointment with the recent iPhone/iPad launches in which Apple went with an 802.11n Wi-Fi solution rather than an 802.11ac Wi-Fi solution (which is more advanced), Google went with a top-of-the-line BCM4339 5G Wi-Fi chip. This is a double win for Broadcom.
This quells the biggest fears
Over the last several conference calls, there have been concerns that Broadcom is either losing share to Qualcomm or that – even if Broadcom isn't losing share in the high end of the smartphone space – the high end of the smartphone space is simply less relevant.
While that may eventually be the case, it's hard to ignore how voraciously customers are consuming their Nexus 5 devices. The 16GB edition of the Nexus 5 is backordered by at least three weeks, and the 32GB edition by two. One data point does not a trend make, but the demand – even in light of the iPhone 5s launch and the availability of countless Samsung products – seems robust enough.
More interestingly, though, keep in mind that the Nexus 5 may be high end in terms of hardware specifications, but it sells for just $349 for the 16GB version without a contract. Google's goal is to ensnare as many customers into its ecosystem web as possible, so if it feels that it can get away with saving a few dollars here or there by using a more integrated part (or a competitor's part), then it will do so.
Yet here we are, with Google's Nexus 5 sporting a top-of-the-line Broadcom combo chip. Not an integrated Qualcomm part, nor a discrete Qualcomm part, but Broadcom's finest.
Sentiment is bound to turn soon
The sentiment around Broadcom is still poor. Investors are still reeling from the disappointment that they felt when the company failed to deliver on its LTE baseband promises (and had to scurry out to buy Renesas Mobile), and the company's recent decision to lay off about 10% of its workforce seemed to spook people.
That being said, 350 of the 1150 people targeted for layoffs were ex-Renesas, and about 425 are being let go as they are "redundant" in the face of the employees that will be retained from the Renesas acquisition – so it seems like mostly efficiency "cleanup" (as unfortunate is it is for those workers).
More importantly, though, is that if Broadcom is able to gain even a toehold in the LTE space and can show quarter-after-quarter of share gains and execution upon the roadmap given (which, frankly, isn't all that aggressive), then sentiment is bound to turn since this will finally allow Broadcom to compete in the lower end of the market with a complete platform (something that it has been unable to do).
Further, Broadcom's spending on LTE development has been massive and has served as an overhang on the overall profitability of the company's mobile & wireless division – so there's some good operating leverage there.
Foolish bottom line
Broadcom is still in the "penalty box" for a "weak" fourth-quarter guidance (although this seems to be due to a broader inventory adjustment at the handset vendors than any structural problems) coupled with the LTE disappointment, but these will likely pass in time and the shares should – over the next 3-6 months – trade much higher, if all goes as planned.
