While the deal hurts EPS in the short term, it should become accretive to EPS by 2015. Moreover, a major overhang on Broadcom’s share price – the viability of its cellular efforts – should finally be lifted, leading to a near-term improvement in sentiment, and more importantly a new long term revenue stream.
Going for a larger slice of the pie – Bigger risk, even bigger reward
Broadcom’s bread-and-butter in the wireless space – connectivity – is a good business that has grown nicely over the last couple of years. However, the problem is that its connectivity combo chips go for $3-$6, while selling the entire cellular platform (apps processor, connectivity, and cellular) can gross a company somewhere in the range of $10 to $30 per chip. Even better is that this opportunity is largely incremental, as the company already provides connectivity to many platforms that do not use its apps processors or cellular baseband and RF.
However, the risks are also clear. Developing cellular and RF technology is expensive, and building entire system-on-chip platforms is even more so. At some point, these significant investments in cellular need to pay off, particularly as shareholders become increasingly impatient. It’s not exactly confidence inspiring that Broadcom is essentially throwing its own LTE modem out and instead is replacing (while salvaging anything that could be used) it with a modem bought for a mere $164 million in overseas cash.
However, I do remain optimistic that Broadcom’s efforts will indeed pay off. This is a company that is very engineering-centric (77% of its employees are engineers), and the company’s connectivity business – as well as its networking infrastructure and home divisions – are more than profitable enough to support what needs to be done here.
The question is now all about timing and execution. If management can deliver on LTE revenues during early 2014 and if it can follow that up with a next generation, quad-core integrated part during the third quarter of 2014 as promised, then the company’s efforts – as well as the stock – should be in good shape going forward. If not, investors are going to start asking some tough questions about the longer-term viability of this business.
The Foolish bottom line
While I’m disappointed that Broadcom’s own internal efforts ran into a snag, I’m happy that the company got its hands on a rather choice piece of LTE hardware and a great team to go with it. I’m optimistic that investor sentiment toward Broadcom’s longer term growth prospects will finally turn, and if I’m right, it will be a nice few years of renewed growth in mobile & wireless for the company as it takes more of the handset dollar content than it currently has.
The article Broadcom’s Renesas Mobile Acquisition Is a Game-Changer originally appeared on Fool.com is written by Ashraf Eassa.
Ashraf Eassa owns shares of Broadcom. The Motley Fool has no position in any of the stocks mentioned.
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