Broadcom: The Subtle iPhone 5 Play
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With hype turning to near frenzy as we move toward the impending release of the iPhone 5 from Apple (NASDAQ: AAPL), consumers and investors are abuzz with suggestions on how to derive profits from the release. After a direct investment in Apple, buying shares of Qualcomm (NASDAQ: QCOM) seems to be the most popular suggestion. Given the wide exposure the company’s 4G LTE chip has gotten over the last week for its inclusion in several competing devices, the broad use of the chip makes it a worthy recommendation.
An equally strong, yet somewhat more subtle way to play the release is through shares of Broadcom (NASDAQ: BRCM). The company makes a vital component of the iPhone 5 and has solid fundamentals that warrant a careful look. Overall, Broadcom should derive a significant benefit from the release and should be included in your portfolio.
Setting the Stage
With a confirmed Sept. 12 launch date, some analysts are predicting that sales of the iPhone 5 over the device’s lifetime may reach as high as 250 million units. Figures that large bode well for Apple’s ability to steal back some of the customers that migrated to Google’s (NASDAQ: GOOG) Android ecosystem allowing it to surpass Apple as the most highly used.
It also places the buzz over Qualcomm into further perspective. Given that Qualcomm’s 4G LTE chip is in both company’s phones means that big iPhone sales are unlikely to hurt Qualcomm even if they cannibalize sales of new Android releases. While competitors are expected to bring out legitimate alternatives to the Qualcomm chip in 2013, at least for the remainder of the year, the company stands alone.
How Broadcom Will Profit
Broadcom is expected to be a key component provider for the iPhone 5, just as it has been for previous Apple products since 2009. The company’s Wi-Fi chip, which integrates Bluetooth and FM radio, is a critical element of the new device. The chip has been upgraded since its inclusion in the most recent iPad; it is expected to deliver both improved power management and operational efficiency.
Some have posed a reasonable concern that the inclusion of the Broadcom chip is already priced into the stock. The chips that will go into the first wave of new devices must have been ordered several months ago, and may figure into Broadcom’s current guidance.
While this is a valid argument, if the total sales projections are even close to accurate, the iPhone 5 will be a source of recurring revenue for Broadcom for many quarters to come. The initial order may have been priced in to some extent, but the long-term implications remain unknown.
Other Broadcom Features
While a partnership with Apple can be a sole driver of success for some companies, looking beyond this single relationship is advisable. A significant bright spot for the company beyond Apple is its involvement in the near-field-communication (NFC) space (this may prove to be included in the iPhone 5 as well). Broadcom’s 40-NM chip is considered the industry standard in the field and puts it a prime location to compete with Qualcomm and NXPI Semiconductors (NASDAQ: NXPI) in this arena.
While NXPI has shown strong growth characteristics and holds an impressive patent portfolio in the space, Broadcom’s dominance out of the gate is the takeaway. The recent announcement of a collaboration amongst many of the world’s largest retailers to begin developing a stand-alone NFC option to compete with Apple and Google is a positive sign for Broadcom. While the news is still in very preliminary phases, the new entity could spark the next wave of growth in NFC and amongst the companies whose chips make it work.
Broadcom’s 26.4 P/E ratio is in line with the industry average of 26.2, and with a PEG ratio of 0.83, the growth prospects look solid. The company offers a dividend yield of 1.1%, which serves as more of a bonus than an outright reason to own the stock. Overall, however, the fundamentals are solid. With the release of the iPhone 5 serving as one of the more compelling catalysts available, Broadcom is a solid addition to your portfolio.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Qualcomm. Motley Fool newsletter services recommend Apple, Google, and NXP Semiconductors . 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. If you have questions about this post or the Fool’s blog network, click here for information.