Chip giant Broadcom (NASDAQ:AVGO) is set to enjoy significant growth in its wireless chip business this year thanks in large part to a substantial boost in the dollar value of content in the Apple (NASDAQ:AAPL) iPhone 8, iPhone 8 Plus, and iPhone X smartphones.
Broadcom enjoyed that growth thanks to the increased complexity of the wireless subsystems in the devices compared to those found in the prior iPhone models, as well as the addition of wireless charging -- a feature that Broadcom supplies chips to enable.
However, according to Instinet analyst Romit Shah (via Barron's), Broadcom's iPhone dollar content growth story not only stops in the coming iPhone product cycle, but actually reverses.
Let's dive into the details.
Socket losses in LCD iPhone
This year, Apple is expected to launch three new iPhone models -- a direct successor to this year's premium iPhone X, a larger and even more expensive version of the successor to the iPhone X, and a lower-cost model with a less advanced liquid crystal display (LCD).
The LCD model is expected to be the best-selling model in the lineup because it'll be the cheapest. KGI Securities analyst Ming-Chi Kuo, whose track record regarding Apple products is quite good, thinks that the LCD iPhone will make up about half the shipment volumes of Apple's 2018 iPhone models.
Shah reportedly said that Broadcom is set to see its average wireless chip content per flagship iPhone drop from around $23 in the current models to just $19 in the models that'll launch later this year. That drop, Shah explained, will be due to the loss of the so-called PAD filter spot in the LCD iPhone to smaller competitor Qorvo (NASDAQ:QRVO).
Quantifying the impact
Shah explained that Broadcom will face a "roughly $400 million revenue headwind" during the second half of 2018 as a result of the reported socket loss. That's not going to sink Broadcom's wireless business, which generated $5.4 billion in revenue in the company's fiscal year 2017, but it'll sting.
Broadcom may be able to partially offset the bad news if shipment volumes of the next-generation iPhone X and its larger counterpart -- high-end devices that'll probably use Broadcom's chips, as performance in these devices trumps cost savings -- grow significantly compared to this year's iPhone X shipments.
Unit growth in Apple's older iPhone models after the new models arrive could help soften the blow, too.
As far as Apple is concerned, Shah says that by shifting the PAD filter orders from Broadcom to Qorvo in the LCD iPhone model, Apple will shave off $100 million in component costs. Or, put another way, with all else equal, gross profit dollars will grow by $100 million.
Such savings in themselves won't do much for Apple's business, but many cuts of that magnitude arising from shifting to lower-cost suppliers for the 6.1-inch LCD iPhone could allow Apple to either offer the LCD iPhone at a more aggressive price (this could help Apple grow unit shipment volumes and gain share) or it could improve its per-device margins at a fixed price.
Either way, Apple wins.