Analyst days are supposed to be a chance for management to give analysts a solid run-down on the company's priorities and strategic direction. When done right, they also tend to have analysts and investors walking out the door feeling a little better about the company. Broadcom's (Nasdaq:BRCM) analyst day pretty much checked all of the boxes that it needed to, and this remains a chip stock well worth consideration from most investors.
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Some Rare Good News on Guidance
Like most chip companies, Broadcom management took its guidance lower after its last quarterly report. Prior to this analyst day, and in contrast to what we've heard recently from chip companies like Altera (Nasdaq:ALTR) and Avago (Nasdaq:AVGO), management took those earnings right back up. Although the company did not completely match the numbers for the fourth quarter that analysts had prior to the third quarter revision, it comes pretty close and the strength in mobile is a solid positive.
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Is Mobile Increasingly Becoming a Two-Horse Race?
Although there are about a dozen credible smartphone players, the high end of the market largely revolves around Apple (Nasdaq:AAPL) and Samsung, and I'm starting to wonder if the market for mobile connectivity and baseband chips is heading in the same direction.
Broadcom's management walked through some relatively encouraging plans for the mobile business, talking about how fifth-generation WiFi should be supportive of higher ASPs (20 to 30% higher) and how near field communication (NFC) for mobile payments could add up to $2 per device in content. The company is also finally getting into LTE in a bigger way, offering a baseband chip that it says will be more than one-third smaller than Qualcomm's (Nasdaq:QCOM) offering, but with similar performance characteristics.
Management also mentioned some encouraging design wins with mid-range Samsung phones that should offer ASPs around twice as much as current low-end Samsung offerings. While companies win and lose slots all the time, this news could perhaps mitigate some of the risk that Samsung is looking to take this business in-house.
All in all, these were encouraging updates. They also make me wonder if Broadcom and Qualcomm are putting even more distance on would-be rivals like Marvell (Nasdaq:MRVL) and Spreadtrum (Nasdaq:SPRD) and making this a two-horse race akin to Apple and Samsung.
Not Just a Mobile Story
The company also offered some solid optimism on other businesses like broadband and infrastructure. The combination of new standards in North America and good growth in emerging markets like Brazil and India is helping demand in broadband. Looking a little further ahead, markets like video on demand, powerline networking, and pay TV (in emerging markets) all ought to offer some solid organic growth opportunities.
On the infrastructure side, Broadcom is looking to roll out product across all of the major components (access, aggregation and core network) for data centers, while also investing for future growth in software defined networking. Companies like Cavium (Nasdaq:CAVM), Freescale (NYSE:FSL) and LSI (NYSE:LSI) aren't going to just lay down and surrender the enterprise/data center market, but Broadcom continues to have high expectations for the technology it acquired in the NetLogic deal.
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The Bottom Line
I have liked Broadcom for a while now, and I still do. It's not the cheapest chip stock available, but the company is very solidly positioned in one of the best (or only) growth tech markets today (mobile) and there's no turnaround aspect to this story. Yes, there's plenty of competition, but few worthwhile markets don't have multiple competitors and Broadcom seems to have a leg up on many of them.
On the basis of mid-single digit expected growth in free cash flow, Broadcom looks to have a fair value in the low-to-mid $40s. That may not make it a screaming buy today, but it's enough undervaluation to be worth serious consideration.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.
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