Broadcom Corporation (BRCM) Deserves a Place in Your Portfolio

If you happen to take a look at Broadcom Corporation (NASDAQ:BRCM)’s business, you would know that this is a stock which should deliver great returns in the future. Its chips power a number of applications, beginning from mobile devices to set-top boxes to network equipment. Thus, it was no surprise that the company delivered record results for fiscal 2012, and also hiked its dividend by 10%.

However, its outlook for the current quarter didn’t turn out to be as spectacular. Management calls for revenue between $1.82 billion and $1.98 billion, which is below the $2 billion Street estimate. The downbeat outlook is understandable, given that Broadcom’s end-markets will be hit by seasonality and tepid carrier spending in the current quarter.

Broadcom Corporation (NASDAQ:BRCM)

But the outlook covers just one quarter, and Broadcom still remains one of the most solid semiconductor investments you can make in the long run. Its diversification enables it to benefit from growth in data usage and connectivity on different fronts, and also keeps it insulated against slowdown in any one of its end-markets.

The smartphone rider

Apart from a record FY12, wherein it generated $1.93 billion in cash from operations, there’s a lot more to like about Broadcom. For instance, the company enjoys a close relationship with smartphone giants Apple Inc. (NASDAQ:AAPL) and Samsung. Broadcom’s chips are present in abundance in the iPhone and the iPads. The iPhone 5’s Bluetooth and WiFi are powered by Broadcom’s chips, while the 4th-gen iPad has three Broadcom chips followed by the iPad mini with two.

Chip placement in Apple’s devices is a major plus for Broadcom, since sales of iPhones are still growing while the iPad line is on a roll, with a 48% year-over-year jump in sales. There might be question marks about where Apple’s headed, but increasing sales of its phone and tablets bode well for a supplier such as Broadcom.

And just in case you are too apprehensive about Broadcom’s relationship with Apple, Samsung would be the perfect hedge. Broadcom’s chips are placed inside a number of Galaxy devices, beginning from the Galaxy S III to the Galaxy Note II and the recent budget Galaxy phones such as the Galaxy Grand.

Breaking new ground

Broadcom is also focused on profiting from the growth of near field communication (NFC) technology. It already has more than 20 customers for NFC, and aims to grow its NFC market share in double digits this year. Broadcom’s connectivity combo SoCs are finding great adoption and it shipped around 200 million units in the previous quarter.

The company is also making a foray into 3G baseband chips, an area which is dominated by QUALCOMM, Inc. (NASDAQ:QCOM). Qualcomm commands half of the baseband processor market, trumping the likes of Intel. Hence, it would be a big challenge for Broadcom in this space, since Qualcomm’s baseband processors already integrate 3G and LTE, and also have a number of strong clients.

But Broadcom isn’t daunted by this challenge, and the company’s design wins at Samsung for the chip are a good start. More importantly, the company is looking to make significant forays into the Chinese cellular market with these chips, since customers in the region are now switching over to faster devices.

Broadcom witnessed a 600% improvement in 3G baseband shipments in the first half of 2012, according to Strategy Analytics, and this further indicates that Broadcom has what it takes to cut its teeth in the stiffly competitive baseband landscape. Broadcom is also investing into an LTE baseband and this could enable it to improve its revenue further.

Broadcom also witnessed a 15% jump in shipments of set top box SoCs, and it won’t be surprising if the company records more gains in the future. It is looking to benefit from the advent of high efficiency video coding (HEVC), which would cut bandwidth requirements in half according to Broadcom and also enable service providers to deliver ultra HD channels.

A short-term concern

Broadcom’s infrastructure business is in a spot of bother due to constrained carrier spending, and management isn’t too upbeat about a turnaround just yet. However, infrastructure spending is expected to rebound this year according to Gartner. If a revival is indeed on the cards, Broadcom’s infrastructure business will probably receive a much-needed shot in the arm.

But growth of data centers and faster networks would help Broadcom in making more money from its infrastructure business in the long run. The market might be depressed now, but it should return back to normalcy once carriers start spending.

The takeaway

A forward P/E of 11 times as against a trailing P/E of 27 times and a PEG ratio under unity tell us that there’s growth lying ahead for Broadcom. It has a bagful of positives to boast of. It is well-positioned to benefit from higher data consumption, build out of faster networks, and sales of more mobile devices. It has a solid array of clients, is looking to tap the Chinese cellular and data market, and is highly-focused on innovation. All these factors make Broadcom a solid company to invest in.

The article This “Well-Connected” Stock Deserves a Place in Your Portfolio originally appeared on Fool.com and is written by Harsh Chauhan.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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