Why Broadcom Still Has a Bright Future
Mobile and networking chip maker Broadcom (NAS: BRCM) came out with first-quarter results that came ahead of Street expectations but turned out to be a letdown for investors for more reasons than one. While revenue stayed essentially flat from the year-ago period, net income took a major hit as gross margins fell from the year-ago period. Relatively weak revenue guidance for the upcoming quarter added to the general pessimism surrounding the stock.
Let's dig deeper to find out what's in store for Broadcom.
Broadcom's first-quarter revenue stood flat at $1.83 billion, including $33 million from its newest acquisition, NetLogic. But net income declined 61% to $88 million, mainly because of higher research and development costs, as well as one-time expenses of around $86 million incurred in settlement of patent infringement claims.
For the time being, the NetLogic acquisition is proving to be costly for Broadcom as gross margins are expected to decline in the current quarter because of the expenses involved. But investors should not worry, as the overall costs should decline in the long run once the company integrates its own operations with that of NetLogic.
Broadcom's $3.7 billion acquisition of NetLogic is likely to significantly boost the prospects of the former's infrastructure and networking division by adding new forms of technology and enabling the company to take advantage of the rapid growth in data traffic and cloud computing. Broadcom stands to benefit from the exposure, as industry sales from this segment are expected to hit around $28 billion by 2016.
At the same time, the company's acquisition of BroadLight should enable it to gain a firmer foothold in the realm of broadband access. And that's not all, as Broadcom's real success can come from the spiraling fortunes of Apple (NAS: AAPL) and Korean giant Samsung.
Broadcom's combo chips, which enable Wi-Fi, Bluetooth, and GPS connectivity, are supplied to Apple and Samsung, both of which are on the top of the recent smartphone and tablet wave. With Apple accounting for around 13% of Broadcom's total revenue, followed by Samsung with a 10% share, the company is expected to benefit heavily from the launch of newer versions of Apple's iPad and iPhone, as well as Samsung's line of products. Another point in Broadcom's favor is that it's currently not upgrading to the 28-nanometer chips, which makes it immune to the problems that industry rivals Qualcomm (NAS: QCOM) and NVIDIA (NAS: NVDA) seem to be facing with their foundry partner Taiwan Semiconductor Manufacturing Co. (NYS: TSM) . Broadcom doesn't expect to sell sizable volumes of 28-nanometer chips before 2013. That's a distinct advantage, because by the time 2013 arrives, TSMC should have solved its supply shortage issues.
The Foolish bottom line
Broadcom is making all the right moves through acquisitions, which are helping it gain an edge in the network infrastructure and broadband access space. The very fact that the company is not facing some of the issues plaguing its industry peers -- as it piggybacks the success of mobile-industry behemoths such as Apple and Samsung -- should go a long way toward brightening its future skyline. To stay up to speed with the latest on Broadcom, feel free to add it to your free watchlist.
Broadcom is just one company capitalizing on the smartphone revolution, more so as it doesn't face supply-side issues. Nevertheless, there are many other companies you can profit from by reading The Motley Fool's newly released free report, called "The Next Trillion Dollar Revolution." So hurry up and click here to get it while it's still available!
At the time this article was published Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Qualcomm. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of NVIDIA and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended writing puts on NVIDIA. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.