Is Broadcom a Better Investment than Qualcomm

Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Broadcom (NASDAQ: BRCM) began shipping its fifth generation, or 5G, WiFi family of semiconductors last year. The 5G technology helps wireless devices work faster and carries signals farther with reduced battery drain than previous generations, Broadcom said. The company also expanded its wireless product portfolio with NFC quad-core chips which targets growth in mass market mobile phones as well as high-end mobile phones and devices.

Broadcom closed its fiscal 2012 with an 8% increase in annual revenues as it gained additional market share in all of its business segments -- connectivity and baseband, network solutions and broadband. This article explains why Broadcom is relatively undervalued than arch-rival Qualcomm (NASDAQ: QCOM) and therefore offers a better investment proposition.

The Wireless Semiconductor Market

The wireless semiconductor market is made up of two different markets:

  1. Mobile baseband chipsets and application processors market
  2. The wireless connectivity solutions market

Broadcom Leads the Wireless Connectivity Segment

Broadcom is the leader in the wireless connectivity segment with approximately 35% market share. This is the fastest growing segment in the wider semiconductor market. The opportunity in wireless connectivity is primarily driven by the growth of mobile devices like smartphones and tablets. Broadcom’s market share in mobility is 90%, which comprises of WiFi, Bluetooth, FM, and GPS solutions solely for mobile platforms. Almost all high-end smartphones use Broadcom’s connectivity solutions.

The company has enjoyed major success with its connectivity solutions in cell phones, most notably the main WLAN slot in the iPhone. Broadcom shipped around 200 million connectivity combos in Q4 2012 alone and its wireless connectivity solutions grew faster than its overall mobile and wireless business in 2012.

Broadcom says it has invented a chip that can tell your phone where you are all the time without quickly draining your battery. The BCM47521 chip will make it easier to use apps that react to the user’s location. That could include tools that mute an employee’s ringer when they enter the office, send a text message when a child leaves school grounds, or tell a retailer when a loyal shopper is near a store.

Broadcom also claims it has the industry’s smallest 4G LTE-Advanced modem, the BCM21892. The modem is said to support LTE FDD and TDD, LTE-Advanced with carrier aggregation, HSPA+, TD-SCDMA and EDGE/GSM. It also supports Band 41 TD-LTE, used by Clearwire, China Mobile and Softbank.

Qualcomm Leads the Baseband and Application Processors Market

Qualcomm is the leading player in cellular baseband market with more than 40% market share. Qualcomm also leads the mobile application processors market with roughly 50% market share in terms of revenue.

Qualcomm has announced its Snapdragon 200 and 400 processors aimed at mid-tier and entry-level smartphones. Expected in handsets later this year, the Snapdragon 200 and 400 will balance the high-end 600 and 800 processors introduced in January.

Qualcomm faces fierce competition from rival NVIDIA (NASDAQ: NVDA). Many of Qualcomm’s Snapdragon chips integrate LTE into a single chip. By contrast, NVIDIA’s newly announced Tegra 4 uses a separate, standalone LTE chipset, the fifth-generation NVIDIA Icera i500 processor.

NVIDIA’s newly announced Tegra 4i chip will also integrate the Icera i500 modem on-die. It will support 8 primary bands and both 2×2 MIMO and 4×4 MIMO transmission modes on LTE. NVIDIA says the chip will be available in 2014.

Broadcom vs. Qualcomm: The Verdict

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BRCM Price / Book Value data by YCharts

Broadcom has a market cap of $17.31 billion with a PE multiple of 26.8x while Qualcomm’s market cap is $113.35 billion with a PE multiple of 17.4x. Although Broadcom appears to be richly valued in terms of PE multiple, the company is attractively valued than Qualcomm in terms of both Price to Book and Price to Sales ratios. With Broadcom operating in the high growth segment of the wireless semiconductor market, I feel Broadcom is a better investment opportunity than Qualcomm at the current price.

Anindya Batabyal has no position in any stocks mentioned. The Motley Fool recommends NVIDIA. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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