On April 30, chip giant Broadcom (NASDAQ:AVGO) announced that it had tightened the range of its financial guidance for the second quarter of its fiscal year 2018 slightly as the strong demand that it saw from data center chip sales was offset by weak wireless chip sales. It also provided preliminary guidance for its third fiscal quarter of $5.05 billion plus or minus $75 million, missing analysts’ consensus estimate of about $5.24 billion. That miss, Broadcom explained, is due to “continued strength in demand from datacenters while wireless remains weak.”
Although Broadcom is widely known as a key wireless chip provider to Apple (NASDAQ:AAPL) — indeed, sales Apple made up more than 20% of the company’s net revenue during its last fiscal year — the reality is that Broadcom’s business is about much more than wireless chip sales.
If you’re an investor in Broadcom or you’re thinking about scooping up some of the chip giant’s shares, then you’ll be pleased to know that company is, in fact, highly diversified. Let’s dive in to the details.
Breaking down Broadcom’s business
Broadcom’s business is broken down into four reporting segments: Wired infrastructure, wireless communications, enterprise storage, and industrial and other.
Although Broadcom’s wireless business gets a lot of attention because of its ties to Apple, it was only Broadcom’s second-largest business by revenue during fiscal year 2017, accounting 31% of total revenue, or about $5.4 billion. Broadcom’s largest business segment was its lower-profile wired infrastructure business, which sells a wide range of products from chips that power your cable box to the Ethernet switches used by major data centers worldwide to push around the huge (and growing) amount of internet traffic. This segment made up 48% of the company’s sales, good for $8.55 billion, during fiscal year 2017, and even grew 30% from the prior year.
That’s not all, though. Broadcom is a major player in the enterprise storage chip market, producing chips that power hard disk drives and flash-based solid-state drives. This segment also builds chips that connect computers to other storage devices on a network. This segment is Broadcom’s third-biggest, generating nearly $2.8 billion in fiscal year 2017 and growing 22% year over year, but it still made up a whopping 16% of the company’s overall sales.
And, finally, Broadcom’s smallest business is its industrial and other segment which sells products to support applications like displays and lighting, factory automation, in-car infotainment, and even renewable energy systems. It only generated $884 million during fiscal year 2017 (5% of total revenue), but it’s growing fast, surging 37% year over year.
Lots of businesses beyond Apple, but don’t count Apple out
There’s no denying that wireless chip sales make up a large part of Broadcom’s business. Moreover, since sales to Apple made up more than 20% of Broadcom’s overall sales, we know that sales of wireless chips to Apple makes up somewhere north of 60% of Broadcom’s overall wireless business.
Broadcom’s business won’t crater if Apple’s sales performance underwhelms, but it’ll hurt. Fortunately, Broadcom has a nice collection of other businesses that serve a wide range of markets that can cushion against any such blow.
However, it’s also worth keeping in mind that although Broadcom’s wireless business does depend on the number of iPhones that Apple sells, Broadcom has been great about getting more of its chips into Apple’s latest iPhones and making sure that each of those chips is worth more than the ones that it sold Apple for the prior iPhone generation. That phenomenon is clearly illustrated in the 45% year-over-year growth that Broadcom’s wireless business enjoyed in fiscal year 2017 even though Apple’s iPhone sales growth wasn’t anywhere close to that.
The point is this: As long as Broadcom can continue to build new, more capable products that Apple’s willing to pay more for (something that Broadcom executives have been bullish about on its earnings conference calls), its wireless business can actually stay flat or even grow even if Apple’s own iPhone business suffers from unit shipment declines (or weaker-than-expected growth).
So, if you’re an investor in Broadcom stock and you’re worried that a potential slowdown in Apple’s iPhone business will sour your entire investment thesis, then what I’d say to you is: Relax!
Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.