Difficult Times Lie Ahead for Broadcom

Difficult Times Lie Ahead for Broadcom

Chipmaker Broadcom has fallen off a cliff in the past six months. Shares have declined close to 25% as its guidance has failed to inspire confidence among investors on the last two occasions. This seems surprising for a company that's deeply embedded into the mobile computing revolution and supplies chips to almost half of the world's smartphones and tablets..

But this also means that Broadcom has much to lose as well, as competitors invade its turf and churn out more technologically advanced products. Broadcom's recently released third-quarter report did its bit to magnify such fears. Management said that it expects its mobile and wireless revenue to drop going into the December quarter -- surprising for a company that should ideally be expected to sell more mobile chips going into the holiday season.

Losing steam
With 47% of Broadcom's revenue coming from the mobile and wireless segment, weakness in this area is not welcome. Being a supplier to both Apple and Samsung, one would have expected that Broadcom would benefit from higher device sales in the holiday period.

However, over the previous conference call, Broadcom management stated that the weakness in mobile is down to the fact that a major smartphone customer (read as Apple) used the 802.11n Wi-Fi standard. Broadcom has been focusing on 5G Wi-Fi technology but Apple stuck to the old standard, leading to probably the same content in the iPhone as last time. Moreover, the latest iPads stuck to the same Wi-Fi standard.

Broadcom supplied the connectivity combo chips to Apple for the iPhone this time as well, along with the touchscreen controller. However, the fact that Apple didn't progress to a more updated Wi-Fi standard seems to have hurt Broadcom. Since it is expected that Apple will account for at least a tenth of Broadcom's sales this year, this particular choice on Apple's part as to the Wi-Fi standard could have a short-term impact on the company's prospects.

And that's what Broadcom expects -- a short-term impact. The company believes that its customers remain firmly committed to transition to 5G Wi-Fi going forward and help Broadcom's growth. In addition, Broadcom management claims that its 802.11ac solution (5G Wi-Fi) is twice as fast when compared to rivals.

A big challenge
Broadcom is also looking to shore up its 4G LTE solutions and it acquired Renesas Electronics for this reason. Broadcom is late to the 4G modem party and the acquisition of Renesas could be thought of as a desperate move by the company as it looks to challenge Qualcomm in this market. Qualcomm commands 63% of the cellular baseband market, according to Strategy Analytics, while Broadcom's is still in the single digits.

Now, to have any meaningful impact on the top line, Broadcom will have to land some high-volume customers for its LTE solutions, an area where it lags MediaTek and Intel also. However, this market would be a tough nut to crack, as Qualcomm has a vice-like grip over it. Qualcomm supplied to the LTE modem, the transceiver, and the power management module to the latest iPhone 5s.

Qualcomm, like Broadcom, is a key supplier to Samsung as well. Qualcomm had supplied a bunch of chips to the Samsung Galaxy S4, ranging from the processor to the audio codec, apart from the LTE modem. In comparison, Broadcom had supplied an updated version of the Wi-Fi combo chip, the GPS receiver, and the NFC chip for the S4. This seems like an impressive collection, but the fact that the S4 is losing its crown to the latest Apple flagship isn't good news.

Apple's iPhone 5s was the top-selling device in the U.S. in September, as reported in The Guardian. Apple was able to sell 4.8 million phones in September itself, despite the device being on sale for just 10 days. Apple increased its smartphone share to 38% in the U.S. and as the holiday season nears, Apple could increase its lead.

Samsung was already reportedly cutting down production of the Galaxy S4 and this had already weakened Broadcom. However, things might get worse going forward. A teardown of the Galaxy S4 Mini by Chipworks revealed that Qualcomm had won the combo chip spot from Broadcom. Hence, if Samsung decides to switch to Qualcomm for its next flagship, Broadcom would be facing more difficulties.

The bottom line
It looks like Broadcom is having difficulty growing its business. Revenue growth in the previous quarter was a mere 0.80% from the year-ago period while non-GAAP net income declined just over 3% as well. Given the challenges ahead and near-term uncertainty around the adoption of its products, it would make sense to wait and watch from the sidelines as to how Broadcom fares.

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The article Difficult Times Lie Ahead for Broadcom originally appeared on Fool.com.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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