Wall Street analysts still are on the fence about Broadcom Corp.’s big ambitions in cell phone chips.
In recent weeks, the Irvine chipmaker announced deals with the No. 1 cell phone maker Nokia Corp. of Finland and No. 2 Samsung Group of South Korea.
The two companies have roughly 60% of the market for mobile phones.
Nokia tapped Broadcom to de-velop chips for lower-cost third-generation phones.
Samsung picked it to make chips based on an up-coming technology standard dubbed Edge, which falls somewhere between second- and third-generation phones.
“It’s a beachhead for us,” said Robert Nale-snik, marketing director for Broadcom’s mobile multimedia group. “We’ve talked about focusing on the top vendors.”
Broadcom earlier was asked by Nokia to make Edge chips and by Samsung to make 3G chips in deals announced more than a year ago.
The announcements have brought a big sticking point for analysts to a head.
Some on Wall Street say the wins go a long way toward justifying the millions Broadcom has spent to develop baseband, or processor, chips,the brains of a cell phone.
Others are skeptical and wonder if the investment is money well spent.
“We prefer the bull case and think that Broadcom’s cellular chip business will be a big revenue and earnings growth driver in 2010 and 2011,” said Craig Berger, an analyst at Fried-man, Billings, Ramsey & Co. in New York.
Along with baseband chips, Broadcom makes power-saving chips, radio transmitters and chips that add Bluetooth, wireless networking, video, TV and GPS functions to phones. “This is a very large chip market and one that Broadcom has the intellectual property to gain meaningful share,” Berger said in a note to clients.
Others say the wins show that Broadcom has a chance to make good on plans to grab roughly 10% of the market for baseband chips.
Right now Broadcom has just a tiny slice of the market, at around 1% or 2%.
“Nokia’s announcement does provide an additional measure of validation,” said Dan Morris, an analyst at Oppenheimer & Co. in New York. “Long term, we continue to view the success of handsets as the most critical element of the Broadcom story.”
Doubters
Some company watchers aren’t convinced.
A big issue is timing,cell phone design cycles are slow and can stretch more than two years before chips are built into phones.
Nokia especially is known for taking its time because of its demands for rigorous testing.
Skeptics “argue that these cellular wins take three to five years to ramp up, and nobody knows how big or small these wins will be until then,” analyst Berger said.
Older agreements with Samsung and Nokia are set to start bringing in revenue toward the end of the year. But the latest deals aren’t expected to produce sales for years.
“That’s a long way off in our world,” said Ross Seymore, an analyst at Deutsche Bank Securities Inc. “I’m still skeptical, but I give them a lot of credit for the win. It’s a story we won’t see on the report card until 2012.”
Broadcom is wrestling with a downturn in chip sales and is paring costs by cutting jobs and other measures.
The Nokia and Samsung win could challenge the company’s cost cutting by prompting more research spending on cell phone chips, Seymore said.
“The irony of these wins is that it necessitates a continuation of the spending that they have done already,” he said. “Entering the cellular space is costing more and taking longer than they would have expected. I think it’s an expensive endeavor.”
Berger of Friedman, Billings is less concerned, saying Broadcom’s research spending, which totaled about $358 million last year, already is built into expectations.
In late January, the company gave a worse-than-expected outlook for the current quarter.
For the first quarter, Broadcom said it’s expecting sales of $800 million to $875 million. Analysts revised their estimates to $845 million, down from a previous outlook of $953 million.
The company’s shares are off some 13% in the last year on a recent market value of roughly $8 billion.
