China is the largest smartphone market and Broadcom Corporation (NASDAQ:BRCM) is working with China Unicom to introduce a smartphone priced below 600 yuan, roughly equivalent to $97. With the company making significant benefits in a niche industry, is now the right time to buy this big-cap wonder?
Recent updates
With the evolution of mobile devices fast changing to smartphones, Broadcom Corporation (NASDAQ:BRCM) continues to benefit from having a widespread presence in the market. The company’s latest strategy involves forming partnerships with local carriers and handset makers in emerging markets. The fierce rivalry of Apple Inc. (NASDAQ:AAPL) and Samsung handheld products, such as the iPhone, iPad and the Galaxy line of devices, feature chips from Broadcom in their operations. As with almost every industry today, short-term performance and fate rests with China’s growth and prospects, and semiconductors are no different.
Over the past 10 years, Broadcom Corporation (NASDAQ:BRCM)’s performance is head and shoulders above its rivals. New technologies such as 5G, NFC, DOCSIS 3.1 and automotive Ethernet are allowing the company the opportunity to flex its financial muscle not just geographically, i.e. in emerging markets, but also in well-developed markets. The interesting transformation in the company’s balance sheet for 2012 was the 100% increase in its intangible assets. This helped Broadcom to create value for its business assets and economic benefits for its shareholders. Furthermore, the company has had positive free cash flow growth over the past six years.
Growth potential
Broadcom Corporation (NASDAQ:BRCM)’s solution for most of its prospective growth lies in innovation. Recently, the company launched the world’s highest performance multi-core communications processors – the XLP900 Series. Broadcom has taken this initiative while keeping in mind that the growth potential that these high-speed processors bear will depend on the availability of high-speed 4G LTE/LTE Advanced services. The first-mover’s advantage lies with Broadcom for the future generation of devices.
While there are difficult times in China, Broadcom Corporation (NASDAQ:BRCM)’s offerings of multiple products in geographically diverse markets will allow the company to offset some of the macroeconomic brunt. While its connectivity chips for mobile devices will continue to do well in developing countries, the company also has a solid footing in the form of research in a cooperation with the large smartphone producer Samsung. Moreover, the company’s offerings include set-top boxes and the introduction of 4K x 2K HD display televisions.
Competition
In the semiconductor industry, Intel Corporation (NASDAQ:INTC) and Texas Instruments Incorporated (NASDAQ:TXN) are the companies which provide Broadcom Corporation (NASDAQ:BRCM) stiff competition.
Intel Corporation (NASDAQ:INTC)’s semiconductor products primarily cater to different technological markets than Broadcom’s, yet these two remain fiercely competitive in their fields. Two-thirds of Intel’s revenue and a greater percentage of its profits come from PCs. The chip maker enjoys an 80% market share for desktop chips and an 87% share for laptop chips.
However, it has just 1% of the market for tablets and even less for smartphones. With the advent of cellphones and tablets, Intel is vulnerable due to its reliance on personal computer and laptop sales. While the company is investing heavily in its ‘Atom’ processors for mobile and tablet use, these chips have still not been adopted by the majority of smartphone and tablet producers.
Exiting the smartphone/tablet market, Texas Instruments Incorporated (NASDAQ:TXN) is currently engaged in expanding the OMAP footprint in embedded applications such as automotive, industrial equipment, enterprise communications, etc. The company expects the embedded markets currently valued at $19 billion to offer greater potential for impressive growth when compared to mobile devices. In 2012, Texas Instruments Incorporated (NASDAQ:TXN) expanded its product portfolio by almost 20%.
| Indicator | Broadcom | Intel | Texas Instruments |
|---|---|---|---|
| Price/Earnings ttm | 23.8 | 12.0 | 21.3 |
| Price/Book | 2.4 | 2.3 | 3.5 |
| Net Income Growth (3 Yr Avg.) | 122.5 | 36.1 | 3.1 |
| Revenue Growth(3 Yr Avg.) | 21.3 | 14.9 | 7.1 |
| Dividend Yield , % | 1.24 | 3.71 | 2.50 |
| Return on Equity | 11.0 | 21.1 | 16.9 |
| Debt/Equity | 0.2 | 0.3 | 0.4 |
| Current Price | $33.80 | $24.23 | $ 34.85 |
*Data from Morningstar on June 29
Intel Corporation (NASDAQ:INTC)’s revenue, growth and reach are undoubtedly far more than Broadcom’s, but the company’s reliance on a fast-declining market segment will hurt it badly. As mentioned earlier, even with Intel as competition, Broadcom has shown mercurial progress. Meanwhile, Intel continued to struggle to keep up with the market averages, and its recent price decline starting from Q3 2012 suggests that the lack of exposure to mobile and tablet manufacturing is affecting the company adversely. Texas Instruments offers a dividend yield of above Broadcom’s and a 3.2% annual payout at recent price levels.
Final verdict
Broadcom’s strong performance will continue to reign supreme over its competitors thanks to a large product offering, innovating its product portfolio and an even larger customer base. Broadcom Corporation (NASDAQ:BRCM) will also benefit from the LTE trend and strong demand for mobile devices and smartphones. While China provides a cause for concern for shareholders, it also provides an opportunity to buy into a company which does not become complacent with its innovative product line and continues to have strong performance.
The article Broadcom: Right Time, Right Stock originally appeared on Fool.com and is written by Marina Avilkina.
Marina Avilkina has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Marina 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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