The tech industry is all about innovation and having diversified product lines and diversified markets to reduce their risk exposure. As the mobile industry is moving quickly toward smartphones and tablets, it is to Broadcom’s advantage. Its chips power many of the handheld devices for Apple and Samsung. As these companies together own more than 62.2% of the U.S. market for smart devices, Broadcom will gain from their extensive market presence in the future as well.
The developed markets are nearing saturation and the sales of high-end, costly phones is also slowing, which is clearly evident from disappointing sales of Samsung’s flagship Galaxy S4 launched recently and other flagship phones by its competitors. I believe emerging markets should provide future potential growth for Broadcom Corporation (NASDAQ:BRCM), and thus Broadcom’s approach to enter into partnerships with local carriers and handset makers in the emerging markets seems like a smart move. Broadcom is currently working with China Unicom (Hong Kong) Limited (ADR) (NYSE:CHU) and is introducing smartphones priced near $100, which should potentially widen the company’s future revenue generation capacity.
4G and 5G: the game changer
Broadcom Corporation (NASDAQ:BRCM) recently launched BCM21892, the smallest LTE 4G enabled chip in the industry. This smaller chip comes with two advantages: first, it’s cheaper to produce; and second, it’s more energy efficient. Moving forward, as the 4G/LTE is the future of wireless connectivity; a strong footing should benefit the company.
Broadcom Corporation (NASDAQ:BRCM) has taken its innovation to a level further and is the first company to introduce a 5G WiFi combo chip for smartphones, tablets, and other mobile devices. This revolutionary move in the 5G network makes it the only chip manufacturer that’s bidding on the 802.11ac standard for every chief WiFi product segment. The 5G technology will offer significant increases in WiFi coverage and transfer speeds, and will also consume considerably less power. This will enhance the efficiency to about six times the current levels.
Competition
The two major competitors in the semiconductor chip industry for Broadcom are Intel Corporation (NASDAQ:INTC) and QUALCOMM, Inc. (NASDAQ:QCOM). Qualcomm is the absolute market leader in manufacturing LTE chips for smartphones, owning about 86% of the total market for LTE chipsets in 2012. The company also leads the market in mobile-device graphics processing units (GPU), and last year, its market share was about a quarter of the entire market.
QUALCOMM, Inc. (NASDAQ:QCOM) owns thousands of patents that assure a steady stream of revenue annually and which are in no way going to be affected in the near future. Its shipment of mobile chips increased 14% in the second quarter, to 173 million compared to last year, improving the revenue by 24% to $6.12 billion. The momentum is expected to continue in coming quarters too, with revenue expecting a boost of about 25%.
Currently, QUALCOMM, Inc. (NASDAQ:QCOM) earns more royalties from 3G than 4G, which is becoming a potential future concern as its revenue from its QTL business will eventually fall when developed markets shift to 4G. As it earns a 5% royalty for 3G, and roughly 3.3% for 4G/LTE, the revenue on the whole will fall even if the number of users doesn’t.
I believe this will not be a reason of concern because, first, the complete transition from 3G to 4G/LTE will take time – at least a couple of years even in the developed markets – and second, the need to backward-integrate will allow Qualcomm to offer 3G compatibility even if it has started providing 4G services. Moreover, many of the developing countries are shifting to 3G now and/or are in the initial stage of their transition from 2G to 3G providing a huge market for 3G.
As Qualcomm leads the LTE market, Intel is noticeably the same giant in the PC industry, as it owns 80% of the desktop-chip market and an 87% share for laptop chips. The concern for Intel is that it is heavily skewed on a fast-declining PC market as its major source of revenue. Moreover, it only owns 1% of the growing mobile and tablet market which puts it into a back seat compared to its competitors.
Intel has the required resources and it is investing profoundly to set a footing in the mobile and tablet market with its Atom processors. The company has not yet gained any major success with its Atom processor, as none of the major mobile and tablet-producing companies are using it in their devices. Presently, the company’s success depends majorly on its new 22-nanometer mobile chip, which is yet to be launched.
Final words
QUALCOMM, Inc. (NASDAQ:QCOM) is without doubt the best when it comes to LTE mobile solutions and is clearly far ahead of the competition, making itself a strong long-term prospect for investors. Broadcom Corporation (NASDAQ:BRCM) is following up closely and has gained great momentum over the last few years with its revenue on the rise. With a diversified market, a concentration in the emerging markets, and a quest for innovation, it will help the company gain further success.
As for Intel, if investors are watching out for its progress in the mobile and tablet segment, they really have nothing to be happy about, even though its tremendous lead in the computer industry acts as a cushion until the company’s R&D in other segments starts delivering. Moreover, Intel’s brand name and previous success of being a market leader in whatever it does, along with a current dividend yield of 4.3%, should keep investors patiently waiting until its mobile and tablet chips start gaining traction.
The article The Best Industry to Invest In originally appeared on Fool.com and is written by tarun bachhawat.
tarun bachhawat has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and QUALCOMM, Inc. (NASDAQ:QCOM). tarun is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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