Why Broadcom Might Sell its RF Wireless Chip Unit

Broadcom (AVGO) plans to sell one of its wireless chip units, as reported by The Wall Street Journal. On Wednesday, the WSJ report stated that Broadcom wants to divest its radio-frequency (or RF) segment. The RF segment is a part of Broadcom’s wireless-chip business that makes filters used in mobile phones.

RF unit could fetch around $10 billion to Broadcom, as told by sources in the WSJ report. The semiconductor giant is working with rating agency company Credit Suisse to find a buyer for its RF unit. According to Raymond James analyst Chris Caso, Apple and rival chipmakers could be the potential buyers of Broadcom’s RF unit.

Chip giants like Qualcomm (QCOM), Qorvo (QRVO), and Skyworks Solutions (SWKS) might show interest in RF business, per Investor’s Business Daily. Per Bank of America analyst too, Qorvo and Skyworks Solutions could be interested in Broadcom’s RF unit, as reported in Benzinga. Notably, Bank of America analyst Vivek Arya has “Buy” ratings on Broadcom, Qorvo, and Skyworks.

Broadcom wants to diversify its business

Of late, Broadcom has been trying to deviate from its forte as a chipmaker, and move to other revenue-generating areas. Amid efforts to shift from the core chip business, the company is looking to expand into the software business.

In November last year, the chip giant bought CA Technologies, which was announced in July 2018. The CA deal helped Broadcom to meet the growing demand for infrastructure software solution needs. Also, the addition added significant revenues in fiscal 2019.

Likewise, Broadcom also bought Symantec’s enterprise business on November 4. Earlier, the company wanted to purchase the whole of Symantec. However, in mid-July, the companies ended acquisition talks due to deal pricing issues. After the sell-off of its enterprise unit, Symantec had only consumer cyber safety business. Later, Symantec was renamed to NortonLifeLock (NLOK). However, last week, software firm McAfee was rumored to buy rival NortonLifeLock.

We believe the RF unit sale is also in line with Broadcom’s strategy to lessen its dependence on its chip business.

AVGO’s software business

Broadcom has witnessed revenue growth on the back of its software business. In the fourth quarter fiscal 2019, which ended on November 3, revenues grew around 6% YoY (year-over-year). Revenues beat the analysts’ estimates. Also, led by deals in the software business, it improved from the preceding quarter.

The $10.7 billion deal of Symantec’s enterprise unit may create over $2 billion in revenues in fiscal 2020. The deal would also bring cost synergies of about $1 billion next year after closing the Symantec’s deal, per CRN.

For fiscal 2020, Broadcom expects revenues to grow in the range of $24.5 billion—$25.5 billion. Revenues were 11% YoY higher from fiscal 2019. Also, they beat initial analysts’ expectations of $23.79 billion. The company is optimistic on the better-than-expected 5G adoption for fiscal 2020.

However, Wall Street analysts were not convinced by the company downplaying its wireless assets. A weaker-than-expected wireless business seems to be disturbing the investors, as reported by Reuters.

Broadcom’s challenges

The chipmaker is still a victim of a choppy chip demand environment. A cyclical downturn in the semiconductor industry further pressurized Broadcom. Also, the Huawei trade ban amid the ongoing US-China trade spat took a toll on Broadcom and other semiconductor players.

US President Trump also ruined Broadcom’s plans to buy Qualcomm in March due to the trade war. Not only this but the trade ban with Huawei dented its sales. Notably, Huawei contributed about $900 million of Broadcom’s sales in 2018.

Meanwhile, we are encouraged by the US-China trade deal progress. The development related to the US and China reaching phase one of the trade deal was positive news for the semiconductor players. Also, Broadcom’s CEO Hock Tan stated in the earnings call that the semiconductor business will return to YoY growth in the second half of the fiscal year. However, investors continue to expect weakness.

AVGO stock is underperforming

AVGO stock closed the trading day at $324.1, down 1.02%. At this price, the market capitalization of the company was around $129 billion. The Broadcom stock is trading 2.1% below its 52-week high of $331.2. Further, the AVGO stock is trading 40.7% down from the 52-week low of $230.33.

We note that, except Intel (INTC), Broadcom has underperformed many of its semiconductor peers due to these challenges. The Broadcom stock returned only 28.6% in the YTD (year-to-date) period, while Intel gained just 25.9%. In comparison, chipmaker Advanced Micro Devices (AMD) returned around 132.02%, as of December 19.

Broadcom peers, including Marvell (MRVL), Micron (MU), Qualcomm, and Nvidia (NVDA), returned 61.4%, 71.9%, 58.7%, and 76.8% this year, respectively. Further, the S&P 500 and VanEck Vectors Semiconductor ETF (SMH) surged 27.9% and 62.8% YTD, respectively.