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Ever since Broadcom's (NASDAQ: BRCM ) fairly underwhelming July report, the company's shares have failed to follow the rest of the market upward. The long-term thesis for Broadcom is still intact. The company's core businesses are still mostly fundamentally intact -- although the cellular baseband efforts are decidedly wait and see. But the shares have lacked a meaningful catalyst over the past several months.
With 2013 winding to a close, there remains one last catalyst that could improve investor sentiment and drive meaningful upside to the shares: The company's annual analyst day.
The need for a full platform
Broadcom's exposure to the smartphone market has largely been in the form of connectivity combo chips, which fetch about $4-$6, although the firm does supply other parts, such as touchscreen controllers. This has been a great business for the company, particularly given that its combo chips are well-known for being market-leading.
Broadcom's share in high-end handsets has been rather robust, even as players like Qualcomm (NASDAQ: QCOM ) and Marvell (NASDAQ: MRVL ) begin to be more aggressive in this space. The fears that Qualcomm will take share have become stronger over the last several months.
The problem for Broadcom in the low end is that handset vendors in this space care about, in the words of the company's EVP of Worldwide Sales, Michael Hurlston, a "shrink-wrapped" platform solution. That is, these low-cost handset vendors want a pre-packaged solution that includes apps processor, cellular, combo, and power management IC all from the same vendor.
For a company with such a pre-packaged solution, this represents a very compelling opportunity as the content per handset goes up substantially. Without such a solution, it is difficult for a company to gain meaningful share in apps processors, cellular, or connectivity.
An expensive focus on cellular
This is why Broadcom has been burning about $600 million per year on its LTE baseband efforts. Unfortunately, this project has been difficult for the company. First, revenue from the company's high-end slim modem parts was originally slated for the second half of 2014 -- Mr. Hurlston indicated that it would be "late 2014" at the recent UBS Technology Conference. That's not good enough. This led to Broadcom's acquisition of Renesas Mobile, which bought it a carrier-certified LTE modem integrated into an apps processor, to accelerate the first LTE revenues.
The company will need to convince investors that this strategy is going to work. It must work both from a product viability standpoint -- Marvell and Qualcomm are fierce players -- and from a return on investment standpoint. The company has managed to keep operating expenses in check during this time of intensive investment in cellular, but eventually Broadcom will need to ramp up the investments in the businesses that currently generate real returns for shareholders. Either the cellular effort begins to pay off, or the company needs to make some tough strategic decisions. The upcoming analyst day will help to provide some clarity to investors here.
What about the rest of the business?
While cellular and wireless will be the hot topic, it'll be interesting to see what the company has in store for the rest of its businesses -- namely network infrastructure and broadband semiconductors. The company's networking business has been doing extremely well over the last several quarters, thanks to the continued build-out of the cloud/datacenter. The company's Broadband business has also grown modestly on a year-over-year basis during 2013, although it will be interesting to see if the growth can accelerate during 2014.
Foolish bottom line
The company's cellular efforts certainly need to pay off sooner rather than later. The investment is large but the payoff isn't quite materializing. During 2014, the company will recognize its first material LTE revenue, and the traction that these initial solutions have will determine how the company proceeds with its investments going forward.
If Broadcom can nail it with the right products at the right time, the company can drive its revenue up significantly -- reaping rewards for its shareholders. If not, the company will probably scale back its investments here. Given how Marvell began to see its revenue base take off once it had the right products, the Broadcom cellular story could still pay off handsomely.
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