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Analyst skeptical on Broadcom's 3G design wins

Posted: 19 Feb 2009 ?? ?Print Version ?Bookmark and Share

Keywords:Broadcom design win? 3G? market cellular chip?

The Feb. 17 announcement that Broadcom Corp. will be a supplier to some of Nokia's next-generation high-speed packet access-based handsets continues a pattern of recent design wins that should position the company to gain share in the cellular handset market in years to come, according to Craig Berger, an analyst with FBR Capital Markets.

But, in a research note published Feb. 17, Berger noted there are two schools of thought on Broadcom's cellular business: a bullish one and a bearish one.

Slow uptake
Bulls argue that the cellular chip market is large and that Broadcom has the intellectual property to gain meaningful market share, Berger wrote. "After waiting for three years for revenues to begin to ramp, the bulls are willing to wait a bit longer," he wrote.

On the flip side, it takes three to five years for new handsets announced by Nokia to actually ramp into production, it's too early to tell how large these design wins will be, and handsets will be low-cost and high volume devices, which might mean Broadcom's gross margins on these products could lower than for typical handset chips (40-45 percent), and below Broadcom's current corporate average gross margin (50-52 percent), Berger wrote.

The bearish case also argues that last week's announcement that South Korea's Samsung Electronic Co. Ltd will use Broadcom's single-chip platform for future Edge handsets is not very meaningful given the large number of baseband suppliers that Samsung already uses, Berger wrote.

"We prefer the bull case and think that Broadcom's cellular chip business will be a big revenue and [earnings per share] growth driver in 2010 and 2011," Berger wrote. "If this does not occur we think eventually management will lower their cellular R&D expenditures, thus returning some of that spending to the bottom line."

Nokia, the world's No. 1 handset maker, announced in 2007 it would stop designing semiconductor in house and buy chips from four key vendors: Broadcom, Texas Instruments Inc., Infineon Technologies and STMicroelectronics Inc. Nokia said Feb. 17 it would also use chipsets from Qualcomm Inc. in its 3G phones.

Nokia also said it would use Broadcom as a 3G baseband, RF and mixed signal chipset supplier for worldwide markets. The two parties will cooperate on technology, including Nokia modem technology, according to Broadcom.

"Today's announcement with Broadcom is a further example of Nokia's commitment to our diversified, multi-supplier chipset strategy," said Kai Oistamo, Nokia's executive VP for devices, in a statement. "This agreement, which targets low-cost, high-volume markets, demonstrates that we view Broadcom as a reliable supplier to bring the benefits of 3G to Nokia customers around the world."

Berger wrote that Broadcom's stock is not cheap based on rough estimate valuation metrics, but that FBR believes the company is one of the key long-term integration leaders and that intermediate-term risk/reward on shares remains attractive.

He said the floor price for Broadcom's stock is like in the $14 to $15 per share range, and that appreciation to $28 to $30 is possible in coming quarter if the cellular business does begin to ramp of if Broadcom's combination chips become a more meaningful revenue driver.

Broadcom's stock traded at $17.28 Tuesday afternoon, down from more than $18 at the start of the day.

- Dylan McGrath
EE Times

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