Semiconductor company Broadcom (BRCM, Financial) announced mixed results recently. Broadcom reported revenue of $2.04 billion, a dip of 2.3% year over year. However, its revenue was up about 2.9% sequentially and came in line with the company’s expected revenue guidance. Going forward, Broadcom's performance has potential to improve. Let's see why.
Connectivity business to drive its growth ahead
Broadcom has decided to get out of the baseband business that has been experiencing a tough time due to the intense competition in the market. Nevertheless, Broadcom remains strong with its connectivity solutions that continue to see improvement in the high-end smartphone and tablets that should drive its growth going forward. Moreover, the company has decided to diversify its connectivity business to the new low-power connectivity solutions for the Internet of Things, and to extend its hands to the support of iBeacon and HomeKit that discloses tremendous growth opportunity for the company in the future.
Broadcom looks pretty solid with almost 33% market share for its connectivity business in the region, despite losing close to 3% market share in the mobile baseband and application processor market, which reflects strong presence of the company in the connectivity market. In addition, Broadcom will also benefit largely from its connectivity chips that are being used in Apple’s iPhone and in other smartphones. It is also increasing its market in the leading-edge 4G technology that should further fetch extra market share for the company.
Moreover, Broadcom has remarkable opportunity ahead as the industry is experiencing growth in China and other emerging regions, where most consumers still prefer to buy handsets under $200, rather than such top-tier devices as the iPhone, thus opening growth prospects for Broadcom’s new low-power connectivity chip solutions.
Broadcom has also announced its first generation SoCs for wireless charging that will enhance growth for its connectivity solutions. Also on the Access Point side, it has recently introduced NETGEAR, the world's fastest Wi-Fi router, powered by Broadcom. These innovations will certainly help the company to tap the underlying growth opportunity and drive its growth going forward.
HEVC and Ultra HD set-top boxes to drive growth for Broadband Communication.
Broadcom indeed looks good with the closure of its mobile baseband business. This decision should help the company to concentrate on the other growing segments such as broadband communication and infrastructure and networking that grew approximately 10% and 25% respectively year-over-year. BRCM’s Broadband communication continues to experience strong market for its set-top boxes, registering about 8% sequential growth in the reported quarter. Broadcom’s key growth drivers in the set-top boxes are the emerging markets, which are now more inclined towards ramp of richer features, including those of multi-stream transcoding, more tuners and a stronger mix of MoCA-enabled platforms that will certainly help the company to gain market in the near term.
The company is investing heavily in the Ultra HD and HEVC set-top boxes that will for sure lead a long-term growth for the company in the future. The company has wide networks of set-top boxes with its franchises across the world that should undoubtedly drive growth for the company as sooner or later these set-top boxes will transition to this HEVC or ultra HD solutions.
In addition, the company is practicing various initiatives to market its Ultra HD solutions. For example, it is powering live Ultra HD broadcast of the World Cup events with some strategic partnership with Sagemcom, Oi and NETServicos. Though the company is in the early phase of this transition to Ultra HD, it sees strong growth for this set-top boxes and considers it as a powerful product cycle that will contribute growth over the coming years.
Apart from this, Broadcom also expects incredible growth for its Broadband Modem that grew more than 15% year-over-year during the quarter. It sees strong growth across its broad-based portfolio of cable, DSL and PON. Also, it has recently launched new generation LTE offerings that should enhance its modem access capabilities as these offerings are optimized for bill of materials cost, and at the core platforms, leveraging its Wi-Fi, DSL, cable and PON solutions.
Lastly, its infrastructure & networking segment also looks very promising with the growth of data center and strong LTE built-outs. Broadcom is benefiting largely in the data center from the transition to the public cloud. Its products such as Broadcom ASSPs, and product cycle transition with the continued ramp of 10-gig are replacing the ASICs solutions. The company has also experienced strong adoption of Broadband’s leading merchant platforms.
Moreover, the company continues to deliver innovative solutions that will build strong foundation for its infrastructure networking. It has recently launched a new 25-gig and 50-gig Ethernet specification that will drive performance and cost efficiency in data centers. The company expects tremendous market opportunity for these products and sees its 25-gig and 50-gig technology as the next intra-RAC interconnect standard in the data center.
Conclusion
Broadcom is currently trading at the trailing P/E of 54.85 and forward P/E of 11.42, with PEG ratio of 1.49 for the next five years signifies remarkable growth prospects for the company in the future. Also, it has strong performance matrix with profit and operating margins of 7.87% and 11.67% respectively. It has operating cash flow of $1.89 billion can cover its total outstanding debt of $1.40 billion, which is well mixed by most measures. Broadcom also has leveraged free cash flow of $1.39 billion. Moreover the analysts have estimated CAGR of 8.90% for the next five years that reflects strong growth for the company going forward.
