After the fairly disastrous July earnings results, Broadcom (NASDAQ: BRCM) finally gets another chance to bat when it reports its quarterly results on Oct. 22. In particular, there are a number of points of uncertainty with respect to the company's mobile and wireless business that will likely be addressed on the call. In particular, investors are quite nervous about Broadcom's connectivity business, so it's worth examining these fears here.
The connectivity question
The single biggest fear on investors' minds with respect to Broadcom is the potential for share loss in connectivity combo chips. Broadcom, unfortunately, suffers the "paradox of No. 1" -- when you're at the very top, the only places to go are flat to down, right? That is mathematically true, but note that Broadcom has been in this precarious No. 1 spot for a while. While it would certainly be a mistake to underestimate the efforts of Qualcomm (QCOM +2.48%) and Marvell in competing for connectivity share -- particularly at the lower end -- Broadcom's lead in adopting the latest Wi-Fi standards isn't showing any signs of slowing down.
That being said, while I am bullish on Broadcom's connectivity solutions, there are a couple of trends that could potentially be worrisome:
- Is there a broad mix shift toward the lower end of the spectrum, where device vendors won't necessarily pay a premium for a more richly featured solution?
- Will a good portion of the connectivity end up integrated into the apps processor, eventually killing the discrete connectivity combo chip business altogether?
- Will the major handset vendors "roll their own" connectivity?
Interestingly enough, Qualcomm has integrated a lot of the connectivity features into variants of its Snapdragon processors over the years. That being said, even given Qualcomm's overwhelming dominance of the smartphone apps processor market, Broadcom has still managed to hang on to its substantial 75% of the LTE handset market with its discrete connectivity combo chips. While integration is great in extremely cost-sensitive markets, there are also good reasons to keep things discrete, such as potentially better performance, supplier flexibility, and so on.
With respect to a potential mix shift down, this is certainly possible. But Broadcom has actually been trying to translate its leadership at the high end to share in the entry-level area with the launch of cost-effective 5G Wi-Fi-capable connectivity combo chips. The next few quarterly results should give a clearer picture of how share is shifting, how margins are affected, and so on.
Unlikely scenario
The final fear, that mobile device vendors will roll their own connectivity chips, seems a bit far-fetched. While some investors may point out the example of Apple developing its own applications processor as a sign that Broadcom will eventually see its connectivity business damaged by Apple and Samsung -- Broadcom's two largest customers -- building their own, the fear is overblown. Broadcom not only spends hundreds of millions of dollars per year designing many flavors of connectivity chips for the varied requirements of its customers, but it has many years of experience doing so. Apple buying the gutted hulk of TI's now-defunct connectivity business doesn't mean that Apple will be able to produce something as good as what Broadcom is able to -- at least not without serious investment, further acquisitions, and a lot of stumbling along the way. Further, these connectivity chips sell for $4-$6, so is it really worth the risk and cost of doing its own connectivity chip just to save a few bucks?
The Foolish bottom line
Broadcom's connectivity technology is generally considered a fairly large step ahead of its competitors, and while there has been a lot of headline noise about Broadcom losing a few sockets here and there, the bottom line is that Broadcom still commands a rather large share in a growth market. Its technology leadership should help it defend its position in the connectivity space. While only time will tell, the upcoming earnings report on Oct. 22 should shed some more light on the situation.
