Broadcom May Have Begun to Break

August 27, 2013, 13:46 pm ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Mobile communication is booming as consumers continue to buy more smartphones and tablet computers. However, some semiconductor companies are doing better than others in the highly competitive chip space, and one noticeably weak stock has been Broadcom Corporation (NASDAQ:BRCM).  After multiple downgrades by analysts and a stock trading near 52 week lows, could this be the time to buy shares of Broadcom?

Shares of Broadcom fell sharply after the company reported lower than expected Q2 results and a disappointing revenue outlook for Q3. The company said chips for networking equipment rose much faster than expected, however the mobile and wireless business declined by about 3%. This is significant because mobile and wireless is almost 50% of its revenue and a market in which analysts have concerns about Broadcom's competitive position. A number of analysts downgrades followed the report based on concerns that rival QUALCOMM, Inc. (NASDAQ:QCOM) could be better positioned in the transition from 3G to LTE technology. Qualcomm has recently taken share from Broadcom in the low end handsets like HTC Once Mini and the Samsung Galaxy S IV Mini.

Without a near-term catalyst is on the horizon, investors are not likely to rush into Broadcom shares given the technical landscape. One important event for Broadcom will be the Apple Inc. (NASDAQ:AAPL) iPhone 5s launch in a few weeks. If Broadcom ends up providing the chips in the new iPhone, that alone could provide an improvement in sentiment and drive shares up in the near term. The Stock Traders Daily report show that Broadcom broke below long-term support and long-term support has now been converted to resistance.

Also, the world’s largest mobile phone carrier, China Mobile Ltd. (ADR) (NYSE:CHL) is rumored to be striking a deal with Apple on a lower priced model for China. Apple needs to make up for lost market share in China, but has been reluctant to redesign the iPhone to work on China Mobile’s 3G network.

The obvious fear is that as Apple as it rolls out its next generation iPhone, will also move to a Qualcomm connectivity chip and not use Broadcom chips in the new device or for the lower cost iPhone for China. Qualcomm is one of the best positioned companies when it comes to LTE devices. Also, Qualcom makes separate versions of its Snapdragon chips for 3G and LTE, and Apple would not want a value priced iPhone to offer the same kind of graphics and video processing as its premium priced device, therefore a less powerful and lower end snapdragon chip would make sense for its China iPhone.

Apple has a history of using Broadcom's chips in everything from the iPhone and iPad to the MacBook Pro, so if Broadcom can continue its relationship with Apple, the stock could bounce back from the recent declines. Stock Traders Daily has BRCM neutral long-term, but BRCM recently broke below longer term support, and when it did that was a sell/short signal.  Details are available in our report.

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