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Broadcom Bets on a Wireless Rebound

By Ashraf Eassa – Updated Apr 13, 2019 at 1:01PM

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Things should get better from here for one of the chip giant's most important businesses.

In its most recent quarter, chip giant Broadcom (AVGO -1.61%) reported a 12% year-over-year drop in revenue from its semiconductor solutions business. That decline, CEO Hock Tan said on the conference call following the earnings release, was driven by a large decline in its wireless chip business during the quarter and the fact that its "storage business underperformed somewhat." 

What saved Broadcom from an even larger decline was the fact that its networking business delivered another quarter of double-digit growth and that its broadband business, which had been suffering from steep declines for a while, "has started to recover and stabilize[d] in the quarter," in the words of CEO Tan.

An image of a semiconductor wafer being processed.

Image source: Getty Images.

But after a rough first quarter for the wireless business -- as well as expected weakness in the second quarter of the company's current fiscal year -- Broadcom is betting on a significant rebound in that segment during the second half of the year. 

Let's take a closer look at what's driving that optimism. 

Check out the latest earnings call transcript for Broadcom.

More market share

One thing that's putting a damper on Broadcom's wireless business in the first half of fiscal 2019 (as it did in the back half of fiscal 2018) is that Broadcom lost some share in Apple's (AAPL -2.01%) latest iPhone lineup; in particular, it lost chip share in the iPhone XR. 

That share loss wasn't due to Broadcom dropping the ball on technology or product execution. Instead, as Tan explained at the time, the iPhone XR didn't require the most advanced technology that Broadcom had to offer, so Apple could get away with sourcing cheaper alternatives that did the job adequately.

On the company's most recent earnings call, Tan said that one reason he's optimistic about Broadcom's wireless business in the second half of the year is that the company "is probably [going to] get better share." Growing market share is a good way to deliver overall revenue growth. 

More content

The next factor that should drive growth for Broadcom's wireless business, according to Tan, is dollar content growth in new smartphones. The bulk of Broadcom's wireless revenue -- about 80% in fiscal 2018 -- comes from sales of wireless chips to Apple, so it's probably safe to assume that the content growth Tan is talking about primarily refers to Apple's next-generation iPhones. 

First, Tan cited Broadcom's customers' transitions to the company's latest Wi-Fi 6-capable chips as something that will drive a "strong content increase." 

Although Broadcom's mobile Wi-Fi franchise is certainly a key part of its wireless business overall, the segment also depends heavily on sales of its RF chips. Such chips, Broadcom explains in its most recent annual filing, "selectively filter, as well as amplify, RF signals." 

"Filters enable modern wireless communication systems to support a large number of subscribers simultaneously by ensuring that the multiple transmissions and receptions of voice and data streams do not interfere with each other," reads the filing. Broadcom's RF chips are based on a technology called film bulk acoustic resonator (FBAR). 

Put simply, Tan indicated that with each new smartphone generation, the company needs to build more-sophisticated FBAR chips to support its customers' product ambitions. Each generation of FBAR chips should fetch higher prices than did their predecessors, translating into a per-device dollar content increase for Broadcom and ultimately, revenue growth. 

The investor takeaway

Broadcom's expectations for a rebound in its wireless business are certainly credible. At this stage, Broadcom should have a very good idea of what its largest wireless chip customer -- Apple -- plans to use in the iPhones that it wants to launch later in the year.  And it would also be reasonable to expect that the pricing of the components Apple plans to use is more or less set in stone, underscoring management's confidence in the resilience of its wireless revenue. 

Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.

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