I have to admit that being the "lone bull" on Broadcom (NASDAQ: BRCM) has been a somewhat difficult road since its less-than-stellar showing at its July earnings call. However, while the July earnings call was less than stellar, the situation has substantially improved since then. The company made a strategic acquisition to accelerate LTE revenues into early 2014, and despite taking a writedown on its NetLogic acquisition, seems to be gaining material traction in the network processing unit ("NPU") space. I also believe that Apple's iPhone 5C launch, as well as the launch of Intel's "Bay Trail" tablet platform, will prove to be tailwinds for the company's connectivity business.
Broadcom displaces EZChip at ZTE
While mobile chips tend to get the spotlight, it's important to note the good quarter of Broadcom's revenue base actually comes from network infrastructure chips. In order to expand its presence in this space, the company acquired NetLogic Microsystems, a leading developer of multi-core embedded processors as well as knowledge-based processors (these are processors designed to process packets in computer networks).
While the company recently took a $461 million writedown on the acquisition, the company has been adamant that the long-term strategic value of the acquisition remains intact. Indeed, with the recent note published by Maxim's Ashok Kumar stating that Broadcom just won a major socket at telecom equipment vendor ZTE Corporation, displacing EZChip (NASDAQ: EZCH), it seems that Broadcom's strategy is beginning to pay off.
Of course, while this win is optically significant, it's helpful for investors to keep in mind that the value of this particular socket is on the order of a couple of million per quarter. It does bode well, however, for share gains going forward, and ultimately sentiment around Broadcom's network semiconductor business.
Broadcom likely in the iPhone 5C, 5S
While Apple (AAPL 1.62%) investors were disappointed that the "cheap" iPhone 5C is still very much a high end, only a slightly cheaper device, the good news for Broadcom shareholders is that such a high-end device is likely using a premium Wi-Fi chip from Broadcom, as previous iPhone releases have. It's disappointing that the 5S/5C didn't come packed with NFC (which could have been an increased the dollar content opportunity for Broadcom), but the fears that Broadcom would lose this socket have largely subsided – although we will know in the affirmative once iFixit does a tear-down of the device.
Intel 'Bay Trail' reference design sports Broadcom GPS and Wi-Fi – More tablet momentum up ahead?
At the Intel (INTC 2.20%) Developer Forum, I had a chance to play with the form factor reference design for Intel's upcoming "Bay Trail" system-on-a-chip. While it is too early to tell how much traction these devices will gain in the market, a quick peek at the device manager within Windows told me that the design came packed with a Broadcom Wi-Fi and GPS chip.
It is my belief that Intel's "Bay Trail" platform is also validated with Intel's "Wilkins Peak 2" 2x2 802.11ac + Bluetooth combo chip at the high end (although I am working to get confirmation of this), but appears to also be validated with a suite of Broadcom's parts, particularly as I do not believe Intel itself supplies a wide range of connectivity combo chips. I also highly suspect that the platform is validated with NFC solutions from Broadcom and NXP Semiconductor, but I am unclear as to whether Intel has its own NFC solution. At any rate, I believe that this could be a real positive for Broadcom's share across the tablet/convertible PC space, particularly if Intel's platform takes off.
Conclusion
Broadcom is a classic example of a high-quality, beaten-down name with plenty of upside potential. While I believe that the company still needs to prove itself in the cellular space, and while I would keep an eye on potential market share shifts in the connectivity combo space, I'm excited by the networking opportunity and believe that if the company executes correctly, there is a multi-year growth opportunity across all of its operating segments.
