Shares of Broadcom (AVGO 0.61%) are trading close to 52-week highs after the company's fiscal second-quarter results and guidance beat Wall Street estimates, prompting analysts to boost their price targets in anticipation of a better second-half performance. The semiconductor specialist has some strong catalysts in both its wireless and enterprise storage businesses to sustain its impressive financial growth.
Let's look at why Broadcom is still a good investment despite its nearly 50% run-up over the past year.
Image source: Broadcom
Wireless is about to get better
Broadcom's wireless communications business is quickly becoming a big contributor to its overall revenue, thanks to the growing adoption of its solutions among prominent smartphone original equipment manufacturers (OEMs). Revenue from this business grew 45% year over year during the second quarter -- accounting for 28% of the overall revenue -- thanks mainly to the production ramp-up of the Samsung Galaxy S8.
A teardown of the device reveals that Broadcom has managed to increase its radio frequency and Wi-Fi connectivity content in Samsung's latest flagship. This is great news for investors, as the Galaxy S8's sales crossed the 5 million mark in less than a month, prompting Samsung to boost production which sets Broadcom's wireless business up for more growth.
But Samsung isn't the only catalyst for Broadcom. Management is also confident of winning a substantial increase in content at its "large North American smartphone customer" -- namely, Apple, which will be using eight of its chips in its next-generation device. Specifically, Broadcom expects 40% content growth at Apple.
The company's dollar content in the previous generation iPhone 7 and 7s had jumped 30%, and a suspected new Broadcom-enabled feature in the next iPhone could boost its content share further. It's widely expected that the chipmaker is going to supply the wireless charging solution for the iPhone 8, which could add a potential $500 million to $600 million in revenue to its coffers.
Broadcom's wireless business could, therefore, grow at a faster pace toward the back end of the year, once Apple's iPhone production ramp-up begins.
Enterprise storage growth will be another tailwind
Broadcom is making huge strides in enterprise storage, as its latest results indicate. Revenue from this segment was up 36% year over year, thanks to strong demand for hard-disk-drive (HDD) and solid-state drive controllers. This segment's revenue contribution is now 17% of the company's top line, but investors can expect more gains, given the problem that Broadcom's storage chips solve.
Broadcom's storage chips are geared to increase the capacity and density of HDDs, so their demand could rise as the amount of storage per disk is increasing. For instance, last year, HDD shipments fell 9.5% from 2015 levels, but the total capacity of the drives jumped close to 30%.
This trend isn't going to die down anytime soon, as high-capacity HDDs are the future of the industry, thanks to their growing adoption among data centers for cloud storage. In fact, HDD specialist Seagate believes it will start shipping 20TB HDDs by 2020, compared with 14TB and 16TB configurations in the near term, boosting the market for Broadcom's controllers.
What's more, Broadcom is in the process of making a bigger bet on this market, as it's one of the favorites to acquire Toshiba's flash memory business. Broadcom could buy its way into a booming 3D NAND flash memory market if this deal goes through, and that market could turn into a $39 billion business by 2022, according to one estimate.
The Foolish takeaway
These two catalysts are powerful enough to help Broadcom sustain its terrific growth rate over the long run. So it's easy to see why analysts expect the company's bottom line to grow at 15% annually for the next five years, paving the way for Broadcom stock to soar beyond its current 52-week high.
