Chipmaker Broadcom (BRCM, Financial) has enjoyed a renaissance in 2014 as shares are already up 7%. The company is operating in a high-growth area of manufacturing connectivity chips, because of which it can continue its outperformance going forward. Moreover, illustrious clients such as Apple (AAPL, Financial) and Samsung will help Broadcom profit from smartphone sales, while the deployment of 4G in key markets across the globe will be another tailwind. Let's take a look at Broadcom's prospects and the various catalysts that could drive its growth.
Apple And Samsung Will Drive Growth
As mentioned earlier, Broadcom looks set to benefit from smartphone sales as it supplies chips to Apple and Samsung. Pre-orders for the Samsung Galaxy S5 are soaring as it has already surpassed its predecessor, the Galaxy S4, by a whopping 130%. The phone is expected to hit the market on April 11, and whether it will sustain this surge is yet to be seen. However, the lack of significant new features may not be enough to satisfy tech enthusiasts who have been waiting for the device for quite some time now.
This set's up Apple's iPhone 6 for a grand slam start. People all around the world eagerly wait for Samsung's and Apple's flagship devices every year and given that Samsung has only marginally improved the Galaxy S5 as compared to the S4, the iPhone 6 can be off to a great start.
Tech enthusiasts are hoping that Apple will add many new features to the iPhone 6 and if rumors are to be believed, Apple is on track to fulfill these expectations. Apple is planning to launch devices with bigger screens as it is targeting markets where larger screen sizes are in vogue and the latest speculation suggests that Apple is preparing the iPhone 6 with a 4.7-inch screen this year.
In addition, both Canaccord and Forbes are confident that the iPhone 6 will come with a durable sapphire display with a bezel-free design. This will make the device stronger and thinner. Apart from this, rumors suggest that Apple will add many new features like a better processor, improved camera, upgraded display technology, etc.
Also, Apple is aggressively looking to improve its sales and CEO Tim Cook has announced that 50 more carriers will get the iPhone in the current quarter, globally, according to the Wall Street Journal. This will open up more addressable market for Broadcom's chips going forward as sales of Apple iPhones increase.
Product Innovation
Towards the end of February, Broadcom introduced the industry's first 5G WiFi (802.11ac) 2x2 Multiple Input Multiple Output (MIMO) system-on-a-chip (SoC) for smartphones. Traditionally, Apple has used Broadcom's SoCs in all of its Wi-Fi embedded iDevices which indicates that this new chip will be used in the upcoming iPhone 6. Broadcom claims that this chip will double the performance for video and music downloads, improve upload speeds at big public events like concerts, increase Wi-Fi range, and improve battery life. Even if half of these rumors prove to be true, the iPhone 6 will be a pretty big leap forward from its predecessors.
Other Markets And Moves
Broadcom's new ventures such as passive optical networks (PON) and small cells have been growing at a brisk pace as faster networks are deployed across the globe. Broadcom is expanding its market by tying with new operators in new regions. The company is increasing its research in ultra HD and is specializing in HEVC-enabled products, which doubles the capacity of existing networks. With the increasing use of ultra HD and strong demand for HEVC in developed countries, Broadcom has a fantastic opportunity ahead of it.
Content providers are shifting towards ultra HD and the decreasing prices of ultra HD TV's has made it affordable for consumers. Keeping this in mind, Broadcom has become a key contributor to ultra HD systems. It has developed set top box SoCs for ultra HD and HEVC, which is first of its kind in the industry.
In the broadband segment, Broadcom is focusing on innovation of its existing designs. Broadcom has launched a new DSL SoC, which supports ADSL, VDSL2, and vectoring, while powering its Ethernet and Wi-Fi technology.
The deployment of LTE base stations in China will be the primary demand driver of Broadcom's multi core processors. China Mobile (CHL, Financial) plans to deploy around 500,000 base stations in 2014, which is a vast opportunity for the chip maker to cash in on. Also, Broadcom's smaller, lower power, and high performance chip solutions should enable it to land more market share and benefit from LTE deployment.
Conclusion
Broadcom has a high trailing P/E of 43, while its forward P/E of 11.03 suggests that solid earnings growth is in the offing. The deployment of LTE base stations in China, the roll out of flagship phones from Apple and Samsung, and the overall growth in connectivity are important tailwinds for Broadcom investors. Although the stock might be overpriced right now, but going forward, it seems to be a good investment based on various catalysts.
