Do Connectivity Stocks Present a Strong Growth Opportunity?
Connectivity chips are becoming another key component as the world moves toward IoT (Internet of Things). Connectivity chips include cellular baseband modems, RF (radio frequency) chips, Wi-Fi and Bluetooth chips, GPS (global positioning system), and NFC (near-field communication) chips.
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Connectivity chip suppliers like Qualcomm (QCOM) and Skyworks (SWKS) peaked in 1999 and 2000 when the mobile revolution began. Broadcom (AVGO) was created with the acquisition of several companies, including Broadcom, Emulex, and LSI.
As the 4G adoption in China (FXI) increased in 2014, Qualcomm’s stock rose to an all-time high of ~$80 in April 2014, but legal, regulatory, and technology headwinds sent the stock spiraling down in 2015. The company returned to strong growth in 2016.
A slowdown in the smartphone market, from which Qualcomm earns over 90% of its revenue, encouraged the company to expand into adjacent markets. It announced the acquisition of automotive semiconductor giant NXP Semiconductors (NXPI), but a licensing lawsuit with Apple (AAPL) followed by regulatory probes in the US, Europe, and South Korea have made investors cautious about Qualcomm’s growth potential.
Broadcom stock has grown 38.5% since the start of 2017, and the company has been undergoing restructuring. It sold its IoT wireless connectivity business to Cypress Semiconductor (CY) and is now attempting to acquire Brocade Communications (BRCD).
Broadcom stock is still likely to grow in 2017. Analysts are bullish on Broadcom and increased their consensus price target from $215 in February 2017 to $280 in August 2017. The company’s growth will likely be driven by Apple’s upcoming iPhone 8.
Connectivity chips long term outlook
In the data-centric world, everything from home appliances to security cameras on the streets will likely be connected to the Internet. Meanwhile, the convergence of voice, video, and data networks is increasing data traffic, resulting in network congestion and privacy and security issues among wireless networks, creating the need for robust 5G connectivity.
Strategy Analytics expects RF compound semiconductor revenue to grow at a CAGR (compound average annual growth rate) of 13% to $11 billion by 2020. While the overall connectivity market has strong growth potential, the stock price of each company will likely vary based on company-specific factors.