Broadcom Corporation (BRCM, Financial) provides semiconductor solutions for wired and wireless communications, including voice, video, data, and multimedia connectivity in the home, office, and mobile environments. The stocks have registered a gain of around 47% during the past year, clearly outperforming the 20% gains of NASDAQ. The chip-maker has beaten EPS estimates for six times in a row and in nine out of ten times in the past. Let’s take a look at the underlying business of the company and what it holds for investors.
Looking back
The company delivered strong results in the first quarter of 2015, with revenue coming in at upper end of its guided range. Reportable segment revenue grew 11% year-over-year to clock $2.06 billion, representing an overall growth of 3.7% year-over-year. The growth of 11% year-over-year is excluding the cellular baseband business, thus showing that the decision to do so is yielding good results. This is allowing Broadcom to focus on areas that will deliver growth going forward.
On the back of a long revenue growth, earnings per share came in at $0.64, beating consensus estimates of $0.60.
Growth drivers
The LTE wireless market is expected to reach $78 billion by 2018. According to Susan Eustis, “LTE Wireless Infrastructure is being installed to upgrade core networks and upgrade backhaul and base stations to make systems more modern. Infrastructure for the Internet and for smart mobile devices creates demand for more sophisticated web development and web applications that in turn depend on more sophisticated infrastructure. Everything is going mobile. This evolution is driven by mobile smart phones and tablets that provide universal connectivity. Modern systems represent a significant aspect of Internet market evolution.”
According to Statista, In December 2012, there were around 1 billion HSPA and 60 million LTE subscribers around the world. The source estimates that by 2018 the number of LTE subscribers will have increased to almost 1.35 billion.
This growth potential in the 4G LTE market will drive demand for Broadcom's LTE and TDS CDMA solutions. In particular, China is a huge market for 4G LTE, where Broadcom has already secured wins for processors, switches and backhaul solutions.
Also, there’s a lot of activity in the Smartphone’s Internet of Things, or IoT, market. Broadcom shipped substantial number of WICED development kit, a complete hardware and software solution for prototyping IoT products. IoT market will be another growth driver for the company going forward.
Explosive growth of mobile broadband in emerging markets is another growth driver going forward. Mobile broadband market is expected to grow at a CAGR of 16% over the next five years in the emerging markets, according to IDC. In addition, new technologies such as ultra HD and HEVC are in early phase of adoption and are expected to drive growth for many years down the line.
Looking ahead
Broadcom has a strong balance sheet with a with a cash position of $2.95 billion compared to a debt of $1.59 billion. This leaves a good room for the company to invest in product development and also look for inorganic growth as and when opportunities become available. In addition, the company has generated operating cash flow of $1.29 billion and levered free cash flow of $750 million during the course of last year.
Based on the current momentum, the company expects net revenue in the second quarter to be $2.1 billion give or take $75 million, which is ahead of consensus estimates of $2.07 billion.
Final words
All said, the company looks on solid footing as far as growth story goes. In addition, it has a dividend yield of 1.30%, and the healthy cash flow numbers makes the company capable of sustaining its dividend, going forward. Hence, it is a good stock to hold on to for long-term
