Valuing Broadcom: How High Can It Go?

Following Broadcom's (NASDAQ: BRCM  ) announcement that it would cease pursuing cellular baseband and, in the process, save about $700 million per year in GAAP operating expenses, the shares have soared. While it is clear that this is directionally a net positive, a question worth exploring is just how much the company is actually worth following this dramatic move and whether the shares -- currently trading at a hair under $38 a piece -- still represent a compelling investment opportunity.

Sizing Broadcom's businesses
The chart below breaks Broadcom's business down into its three major operating segments and gives revenue and operating profit data for each:


Revenue (2013E) (in billions)

Operating Profit (2013E) (in billions)

Mobile & Wireless



Broadband Communications



Infrastructure and Networking



All Other (i.e. stock based comp, one-time charges, and amortization of acquired intangibles)

$0.086*-revenues principally consisted of royalties from Qualcomm (NASDAQ: QCOM  ) , but no longer recurring.

($0.648) – excludes one-time writedown associated with NetLogic acquisition

Total Broadcom



Source: Broadcom

Now, note that following the company's divestiture/sale of the cellular business, the company's Mobile & Wireless business should see the following broad financial impact:

  • $600 million of non-GAAP R&D wiped away from Mobile & Wireless
  • $100 million of stock based compensation to be eliminated (from "All Other")
  • $500-$800 million of the company's connectivity business at the low-end and midrange becomes "at risk" as Qualcomm and MediaTek aggressively push their connectivity solutions along with their cellular products
  • $200-$250 million in cellular baseband revenue during the first half of 2014 (roughly implying cellular at a $400-$500 million annual run rate) goes away when the business is wound down/sold (generating only "tens of millions" of gross margin – let's call it $30 million)
  • $50 million of the savings from mobile will be reinvested in infrastructure and broadband

Constructing a new model
Let's assume that the size of the low-end/midrange connectivity market sits at the midpoint of the range given by Broadcom's management ($650 million) and let's assume that Qualcomm/MediaTek are able to take about 30% of that share away ($195 million or so wiped out). Assuming that this is mid-teens operating margin (15%) business, we can construct a new, more accurate representation of the what the business would have looked like in 2013 if the cellular business had been gone and the connectivity business lost the related share:


Revenue (2013E ex-cellular est.) (in billions)

Operating Profit (2013E ex-cellular est.) (in billions)

Mobile & Wireless



Broadband Communications



Infrastructure and Networking



All Other (i.e., stock based comp, one-time charges, and amortization of acquired intangibles)


($0.548) – excludes one-time writedown associated with NetLogic acquisition

Total Broadcom



Source: Broadcom, Ashraf Eassa estimates

With operating income set to grow approximately 61% as a result of the cellular divestiture, it's no wonder that the share price was up about 20% last week. Interestingly enough, before the announcement of the cellular divestiture, Broadcom's shares traded at $31-$32, or about 18 times operating income. Now, the following is crude (particularly as some investors probably expected Broadcom to pull the plug on cellular), but applying a similar multiple to the new estimates yields a $26 billion market cap or roughly $50/share.

Foolish bottom line
After running these numbers, it's clear that Broadcom's financials improve pretty dramatically as a result of the cellular divestiture even if you assume sizable share loss in connectivity and a complete wipeout of preexisting cellular revenues. Further, given that Broadband is probably a business that grows mid-single digits long-term, infrastructure a potentially low-double digit grower, and connectivity potentially poised for growth after the low-end and midrange take whatever hit they're going to take, the business looks in pretty good shape and the stock could go much higher in the long term.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its 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 (5)

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: 2987582, ~/Articles/ArticleHandler.aspx, 8/28/2015 8:26:21 PM

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 Moments ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

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

8/28/2015 3:59 PM
BRCM $51.79 Up +0.14 +0.27%
Broadcom Corp CAPS Rating: ****
QCOM $57.45 Up +0.09 +0.16%
Qualcomm CAPS Rating: ****