Broadcom: What if They Exited Wireless Entirely? Asks Bernstein
By Tiernan Ray
Bernstein Research‘s Stacy Rasgon today reiterates an Outperform rating on shares of chip maker Broadcom (BRCM), and a $36 price target, writing that “Lack of traction in Broadcom’s “baseband” business is at the core of the investment controversy around the stock today,” referring to the company’s attempt to break into the wireless chip business that is the bread and butter of Qualcomm (QCOM).
“Despite several billion dollars of investments, Broadcom’s baseband efforts have failed to deliver the goods so far.”
Rasgon thinks exiting baseband is not necessarily a viable option, given that in some ways it can serve to protect the company’s long-standing business of selling WiFi chips, the “connectivity” franchise, as it’s called.
But he does offer some thoughts on other strategies that would involve winding down investments in both baseband and connectivity:
[Scenario #1] While we believe maintaining a strong connectivity franchise will require a successful baseband business, new opportunities arise were Broadcom to be willing to consider exiting Wireless entirely. In such a move, the loss-making baseband business could be shuttered, and the Connectivity franchise sold (Intel as a potential purchaser comes to mind, among others). Based on comps, and Broadcom’s positioning, we believe the Connectivity business could be worth as much a $10 / share in a sale to the right buyer [Scenario #2] Similar to actions Texas Instruments took when their wireless business came under pressure, Broadcom could consider something similar should it become clear that structural headwinds in connectivity are in fact real, and unavoidable. In such a scenario Broadcom would de-invest, and run the business for cash. In such a scenario, we believe the NPV of these cash flows could be worth $3-7 or more per share.
Rasgon observes that doing these things would likely produ