Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



The Clock Is Ticking for Broadcom Corporation's Cellular Efforts

When the mobile applications processor gold rush began, the legions of ARM (NASDAQ: ARMH  ) -enabled semiconductor vendors -- lured by the promise of breaking the "x86 hegemony" in the computing market and becoming rich in the process -- started fighting for the mobile processor crown. However, as time wore on, it became pretty clear that the pot of gold at the end of the rainbow was nothing more than a mirage for all but a select chosen few. Chipmaker Broadcom (NASDAQ: BRCM  ) looks to be next on the chopping block.

Sizing up mobile chips
The tablet applications processor market is worth about $4 billion today and is growing at about 10%-15% annually. The smartphone applications processor market (which usually includes integrated modems) is worth about $18 billion today. Combined, they're worth about $22 billion and according to ARM, the long-term growth rate for these looks to be about a 13% unit CAGR through 2018.

Source: ARM Holdings.

Given that most of the growth appears to be happening at the low end of the market, the revenue growth CAGR in mobile devices is likely to turn out to be a bit lower as the mix does seem to be biased toward lower-value devices. However, a market worth about $35 billion in 2018 is -- again -- nothing to sneeze at, but as you'll soon see, it still isn't a big enough opportunity for this many players.

What kind of revenue does a company need to be viable?
If we look at the gold standard in mobile processors -- Qualcomm (NASDAQ: QCOM  ) -- you'll see that the company invests about $3.5 billion-$3.8 billion per year in operating expenses (R&D and SG&A) for its mobile chip business. The gross margin profile for Qualcomm's chip business is in the range of 40%-45%, and operating margin comes in at about 20% on a revenue base just shy of $17 billion in 2013.

In order to keep up with Qualcomm's R&D machine, a potential competitor is likely going to need to spend about as much, so we're looking at about $3 billion in operating expenses. On top of that, this is a business where gross margins are in the 40%-45% since all of the relevant players are fabless and don't have their own packaging and test facilities. So, in order to really drive breakeven at the kind of investment levels that Qualcomm can afford, a company needs to generate about $6 billion-$7 billion.

In theory, then, this means the market can accomodate about four to five companies running at breakeven by 2018 if the pie were split evenly. However, companies tend not to want to invest heavily in businesses just to break even -- they want to turn a profit. With a 50-50 split, there could be two nicely profitable companies, but this is also an unlikely scenario given history in the semiconductor business (i.e., there is always the dominant player and the secondary one, with the dominant vastly more profitable).

Could Broadcom be that No. 2?
At the recent J.P. Morgan Tech & Telecom conference, CEO Scott McGregor had the following to say with respect to the status of its cellular efforts:

In our conference call, I said that we expect to see feedback from our customers in terms of design wins over the next few quarters, possibly sooner. So I think that the team has done a fantastic job creating these technologies and it's a bit like we have a storefront and we have beautiful products in the window and now over the next couple of quarters, possibly sooner, those customers are going to tell us whether they like the products or not and that's the gating item at this point.

Broadcom's CEO is essentially saying that they now have a set of compelling products that could win designs for the 2015 time frame. If the company can't win those designs (and it can't just be a few designs here or there -- it needs to be enough to be meaningful), then it'll probably be lights out for the Broadcom's cellular efforts.

What does this mean for Broadcom stock?
The great thing here is that this is a pretty classic no-lose scenario for the stock. If Broadcom is actually successful in pursuing cellular and can make good money at it, then this could fundamentally redefine its business, driving quite compelling revenue growth for the company. If Broadcom "fails," then it can probably sell its cellular division to a company like Apple or Samsung, which could then pick up where Broadcom's team left off for their own devices.

Either way, Broadcom is going to either grow its business significantly or it's going to stop the bleeding caused by its cellular investments. Both will have a positive impact on the company's bottom line, but obviously one is much more positive than the other.

Leaked: Apple's next smart device (warning: it may shock you)
Apple recently recruited a secret-development Dream Team to guarantee their newest smart device was kept hidden from the public for as long as possible. But the secret is out...and some early viewers are even claiming its everyday impact could trump the iPod, iPhone, AND the iPad. In fact, ABI Research predicts 485 million of these type of devices will be sold per year. But one small company makes this gadget possible. And their stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Read/Post Comments (0) | Recommend This Article (4)

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.

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: 2968751, ~/Articles/ArticleHandler.aspx, 9/2/2015 6:47:56 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...

Ashraf Eassa

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter:

Today's Market

updated 9 hours ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

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

9/1/2015 3:59 PM
BRCM $49.88 Down -1.79 -3.46%
Broadcom Corp CAPS Rating: ****
ARMH $41.26 Down -0.90 -2.13%
ARM Holdings CAPS Rating: **
QCOM $55.02 Down -1.56 -2.76%
Qualcomm CAPS Rating: ****