When Broadcom (NASDAQ: BRCM) doubled down on its purchase of the Renesas Mobile assets, it was clear that the company's attempts to build a world-class LTE-Advanced baseband with the Beceem team that it acquired in 2010 weren't going as well as planned. While management seems cautiously optimistic about its chances as the No. 2 high-end LTE baseband provider, the interesting thing is that by the time the year is out, investors will "win" either way as Broadcom will either actually succeed with its products, or it will eventually give up and sell the cellular business.
Case No. 1: Broadcom succeeds and becomes a major mobile player
The smartphone apps processor market, according to Strategy Analytics, was worth $18 billion during 2013 and is growing at a robust clip. Given that Broadcom's entire corporate revenue base was $8.22 billion during 2013, the incremental opportunity here is quite staggering. That being said, the market is currently dominated by Qualcomm (NASDAQ: QCOM), which has been able to demonstrate a pretty sizable technology lead across all of the vectors that count.
To be quite frank, while Broadcom's connectivity combos are world class, it is probably not going to be one of the top players when it comes to the rest of the SoC, including graphics, CPU performance, etc. It will be competing against Intel (INTC +0.30%) and Qualcomm, whose mobile R&D budgets are higher than Broadcom's entire corporate R&D, and whose experience in designing the requisite individual IPs is much higher. Broadcom appears to be aiming for a mainstream/value play at the low end while going for discrete cellular modem plus connectivity at the high end.
Now, if Broadcom's mainstream SoCs are successful, and if its high-end discrete LTE modems win a major socket, then this will be a veritable "success" for Broadcom and the investment in this area can -- and will -- continue. That being said, if Broadcom can't show truly meaningful progress this year, it'll probably be time to look for another option.
Case No. 2: sell the mobile & wireless business
Right now, Broadcom has a beautiful network/infrastructure business as well as an excellent broadband business. Given that mobile and wireless is now more or less at break-even, these two businesses alone have earnings power of roughly $2.50-$2.60 per share. Assuming a fairly modest 13 times multiple, and adding back the roughly $1.80 per share in net cash, this works out to a fair value for the non-mobile business of about $34-$35 -- a bit higher than the recent price range of $30-$31.
However, if Broadcom were to, say, sell its cellular/baseband efforts and focus solely on connectivity combos, there could be meaningful upside to that valuation in the nearer term. Longer term, however, there are fears that connectivity will be integrated across the board, proving a meaningful headwind to this business. So, if Broadcom really wanted to, it could probably unload its entire mobile and wireless business to either a competitor or to a mobile device OEM looking to further bolster in-house wireless chip capabilities.
Heads or tails, Broadcom shareholders win
Whether Broadcom actually succeeds and grows into its mobile & wireless cost structure, or it gives up and unloads the burden to a company that could reap some pretty serious strategic value from it, Broadcom wins. In the first case, Broadcom sees a nice, juicy revenue stream that should add to EBITDA, and in the second, the company gets a big lump sum for its efforts. Infineon Wireless sold to Intel for $1.4 billion, and it was in extremely rough shape. It is likely that Broadcom could fetch north of $2 billion (about $3.44/share) for its cellular business alone, with potentially much more if it were to also sell connectivity. The former is preferable to the latter, but both end up unlocking shareholder value.
We'll know which path is more likely by the end of this year.
