Broadcom Can Turn Things Around, But It Needs to Fix its Mobile Business

Competition from Qualcomm has hurt Broadcom, but there are other positives that shouldn't be ignored.

May 8, 2014 at 4:00PM

Broadcom (NASDAQ:BRCM) disappointed with its first-quarter results as the company struggled in its mobile and wireless business. The company's profit dropped on a year-over-year basis, and even an earnings beat couldn't save Broadcom shares from dropping. In view of the rising competition from Qualcomm (NASDAQ:QCOM) and Chinese chipmakers like MediaTek, is there any hope for Broadcom's turnaround? Also, will Broadcom's moves in wearable devices bring good news for investors? Let's check.

Weak results
Broadcom's wireless chip business was under pressure as sales of its connectivity chips and baseband wireless chips dropped. The company seems to be losing market share in the mobile baseband market. As a result, its revenue in the first quarter dipped 1.5% to $1.98 billion. Its net income also decreased 14% to $165 million. 

As far as the current quarter is concerned, Broadcom projected its revenue in the range of $2 billion-$2.1 billion, while analysts were looking for $2.07 billion. So, Broadcom's outlook was below the mid-point of Wall Street estimates. However, there were some positives seen in the quarter, and on the back of its product innovation, Broadcom cannot be counted out.

Positives in other segments
Broadcom is witnessing robust demand in its broadband and infrastructure businesses. The chipmaker has deployed the latest technology in the broadband segment, including VDSL upgrades, to facilitate better and faster connections in the residential market. Also, its renewed set-top box solutions with high-efficiency video coding, or HEVC, have given it a strong platform for ultra HD. 

Broadcom's VDSL modems and passive optical network solutions have been growing due to new operator service launches and increased share gains. The chipmaker also expects strong momentum in its DSL business in North America, Europe, and Latin America on the back of new designs that it plans to launch in the current quarter.

Its infrastructure sector also witnessed strong demand, growing approximately 35% year on year. Broadcom's broad range of switches and processor solutions, which power base stations, backhaul, and the core network, saw good sales. The company also experienced substantial growth in 10G and 40G networking as its data-center customers are increasing. 

The company anticipates continued growth in its switching business, driven by the data-center market and service providers that should result in higher demand for its switch and processor family. The LTE build-out in China, along with the adoption of its public cloud solutions and market-leading merchant platforms, should continue driving the infrastructure business. 

Broadcom's small-cell business is on an upswing as well. It recently started shipping its first LTE small-cell solutions to several operators globally. The chipmaker has so far shipped more than 2 million small cells. Also, it has more than 20 OEMs and operators that will be facilitating new LTE designs, which will increase Broadcom's addressable market. 

Trying to tap into wearable devices
Broadcom has also introduced location and NFC solutions in the mobile segment, which is targeting the wearable tech market. These solutions are expected to reduce power consumption by 60%-75% -- which could help to build momentum in the stock.

Broadcom anticipates strong growth in wearables. Recently, Samsung (NASDAQOTH:SSNLF) launched the Gear 2 and Gear Fit, which are powered by Broadcom's chips. Sales of Samsung's Galaxy Gear smartwatches were off to a good start, clocking 800,000 units in sales in just two months.

Samsung is applying aggressive strategies to push its smartwatch sales in an effort to stay ahead of Pebble, Sony, and Apple, which is expected to launch its own version of a wearable device soon. Also, Samsung upgraded the smartwatch recently with a 1GHz processor and gave it a stylish face. 

Samsung is known to be a high-volume player in consumer electronics and since the smartwatch market is expected to grow to 373 million units by 2020, it has already started making impressive moves. Broadcom can ride Samsung to smartwatch glory as it is supplying chips for the device.

Qualcomm's innovation is a threat
However, competition from Qualcomm is a major concern for Broadcom. Qualcomm is trying to usurp Broadcom's leading position in the market for Wi-Fi chips with its new MU-MIMO -- multi-user, multiple-input, multiple-output -- Wi-Fi radio, according to Forbes. With this innovation, Qualcomm can deliver a boost of 2.5-3.6 times in speed, allowing users to download content rapidly, along with reducing latency. In comparison, Broadcom's 5G Xtream technology does not support MU-MIMO, so this could hurt the company going forward. 

Bottom line
The mobile and wireless business is the only point of concern for Broadcom at this point of time. The company is seeing growth in other segments, and if it could mend the mobile business, then it would be a good investment for the long run. Broadcom's moves in smartwatches, the infrastructure business, and the service provider market are looking good, so investors shouldn't count the company out yet.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool owns shares of 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.

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