This Is Broadcom's Year

Whether its mobile efforts succeed or whether it reaps a major payday by selling its mobile division, this is Broadcom's year.

Mar 15, 2014 at 1:00PM

When Broadcom (NASDAQ:BRCM) doubled down on its purchase of the Renesas Mobile assets, it was clear that the company's attempts to build a world-class LTE-Advanced baseband with the Beceem team that it acquired in 2010 weren't going as well as planned. While management seems cautiously optimistic about its chances as the No. 2 high-end LTE baseband provider, the interesting thing is that by the time the year is out, investors will "win" either way as Broadcom will either actually succeed with its products, or it will eventually give up and sell the cellular business.

Case No. 1: Broadcom succeeds and becomes a major mobile player
The smartphone apps processor market, according to Strategy Analytics, was worth $18 billion during 2013 and is growing at a robust clip. Given that Broadcom's entire corporate revenue base was $8.22 billion during 2013, the incremental opportunity here is quite staggering. That being said, the market is currently dominated by Qualcomm (NASDAQ:QCOM), which has been able to demonstrate a pretty sizable technology lead across all of the vectors that count.

To be quite frank, while Broadcom's connectivity combos are world class, it is probably not going to be one of the top players when it comes to the rest of the SoC, including graphics, CPU performance, etc. It will be competing against Intel (NASDAQ:INTC) and Qualcomm, whose mobile R&D budgets are higher than Broadcom's entire corporate R&D, and whose experience in designing the requisite individual IPs is much higher. Broadcom appears to be aiming for a mainstream/value play at the low end while going for discrete cellular modem plus connectivity at the high end.

Now, if Broadcom's mainstream SoCs are successful, and if its high-end discrete LTE modems win a major socket, then this will be a veritable "success" for Broadcom and the investment in this area can -- and will -- continue. That being said, if Broadcom can't show truly meaningful progress this year, it'll probably be time to look for another option.

Case No. 2: sell the mobile & wireless business
Right now, Broadcom has a beautiful network/infrastructure business as well as an excellent broadband business. Given that mobile and wireless is now more or less at break-even, these two businesses alone have earnings power of roughly $2.50-$2.60 per share. Assuming a fairly modest 13 times multiple, and adding back the roughly $1.80 per share in net cash, this works out to a fair value for the non-mobile business of about $34-$35 -- a bit higher than the recent price range of $30-$31.

However, if Broadcom were to, say, sell its cellular/baseband efforts and focus solely on connectivity combos, there could be meaningful upside to that valuation in the nearer term. Longer term, however, there are fears that connectivity will be integrated across the board, proving a meaningful headwind to this business. So, if Broadcom really wanted to, it could probably unload its entire mobile and wireless business to either a competitor or to a mobile device OEM looking to further bolster in-house wireless chip capabilities.

Heads or tails, Broadcom shareholders win
Whether Broadcom actually succeeds and grows into its mobile & wireless cost structure, or it gives up and unloads the burden to a company that could reap some pretty serious strategic value from it, Broadcom wins. In the first case, Broadcom sees a nice, juicy revenue stream that should add to EBITDA, and in the second, the company gets a big lump sum for its efforts. Infineon Wireless sold to Intel for $1.4 billion, and it was in extremely rough shape. It is likely that Broadcom could fetch north of $2 billion (about $3.44/share) for its cellular business alone, with potentially much more if it were to also sell connectivity. The former is preferable to the latter, but both end up unlocking shareholder value.

We'll know which path is more likely by the end of this year.

We just robbed Wall Street, for information
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry. Our analysts have done it before with the likes of Amazon and Netflix. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

Ashraf Eassa owns shares of Broadcom and Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information